"Mises made a distinction between credit that is backed by savings, and credit that does not have any backing. The first type of credit he labeled commodity credit. The second he labeled circulation credit. It is circulation credit that plays the key role in setting the boom-bust cycle process.
When credit is fully backed by savings — that is, it’s commodity credit — it permits the expansion of tools and machinery. With better infrastructure, it is now possible to produce not only more goods but goods of a better quality. The expansion of real wealth is now possible.
In an unhampered market economy, borrowers are users of savings who make sure that savings are employed in the most efficient way — generating profits. This means that real savings are employed in accordance with consumers’ most important priorities. We can thus see here that as long as banks facilitate commodity credit, they should be regarded as the agents of wealth generation.
In contrast, whenever banks embark on the lending of circulation credit, they in fact become the agents of real wealth destruction.
As opposed to commodity credit, circulation credit is not supported by any real saving. This type of credit is just an empty claim created by banks. In the case of commodity credit, the borrower secures goods that were produced and saved for him."
https://mises.org/mises-wire/mises-explains-difference-between-circulation-credit-and-commodity-credit
Michael Matulef
npub1t4…487qz
2024-06-14 17:47:19
in reply to nevent1q…mx5m
Author Public Key
npub1t42gfjzfv74v8xrv65f2lrwd65jr85ysrtdmkkfrvqgcss5r4g0qk487qzPublished at
2024-06-14 17:47:19Event JSON
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"content": "\"Mises made a distinction between credit that is backed by savings, and credit that does not have any backing. The first type of credit he labeled commodity credit. The second he labeled circulation credit. It is circulation credit that plays the key role in setting the boom-bust cycle process.\n\nWhen credit is fully backed by savings — that is, it’s commodity credit — it permits the expansion of tools and machinery. With better infrastructure, it is now possible to produce not only more goods but goods of a better quality. The expansion of real wealth is now possible. \n\nIn an unhampered market economy, borrowers are users of savings who make sure that savings are employed in the most efficient way — generating profits. This means that real savings are employed in accordance with consumers’ most important priorities. We can thus see here that as long as banks facilitate commodity credit, they should be regarded as the agents of wealth generation.\n\nIn contrast, whenever banks embark on the lending of circulation credit, they in fact become the agents of real wealth destruction.\n\nAs opposed to commodity credit, circulation credit is not supported by any real saving. This type of credit is just an empty claim created by banks. In the case of commodity credit, the borrower secures goods that were produced and saved for him.\"\n\n\nhttps://mises.org/mises-wire/mises-explains-difference-between-circulation-credit-and-commodity-credit",
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