Theoretic Foundations: Scissors Require Two Blades—Endogenous Money, Its Modulation, and Its Allocation

This Chapter begins with Part II by laying out the fundamentals of endogenous credit-money and the combined allocative and modulatory functions that endogeneity presses upon any central bank or monetary authority. All bank credit denominated as legal tender by a public sector payments system like that of the U.S. and other ‘developed’ economy jurisdictions, the Chapter shows, is endogenously generated by lending decisions made by publicly licensed banking or cognate lending institutions. The only limits upon such lending are banks’ profit opportunities, determined by those seeking credit, and whatever strictures are publicly imposed in the name of liquidity and solvency assurance. The Chapter then shows how the Fed’s founders at least implicitly understood these features of money and the central bank functions that they necessitated. This, the Chapter shows, was reflected in their acceptance of the RBD. It also is hardly surprising, as eighteenth- and nineteenth-century observers in both the markets and the academy alike—from John Law through James Steuart and Adam Smith down through Leon Walras and Knut Wicksell—seem uniformly to have held far more nuanced understandings of credit and money than did the purveyors of what became orthodoxy during the twentieth century.