The blurring of lines between credit and money is endemic in Anglo-Saxon banking and economic theories. The Monetarist school raised this absurdity to its logical and perverse conclusion, to our our great misfortune. Loose credit more nearly resembles a welfare programme than money.
Credit and money may appear to be interchangeable, but are not, especially at times of economic weakness and uncertainty.
I like this commentary by a former Governor of the Bank of France, Charles Rist:
Chapter I, Confusion between Credit and Money, p. 58
The identity of thought between John Law and Adam Smith has not been sufficiently noted. It is however, fundamental, and explains many of the errors in English currency theory in the following century.
"Money is not the value for which goods are exchanged, but the value by which they are exchanged. The use of money is to buy goods and precious metals while money is of no other use." -- "I consider an écu itself merely as a note drawn up in these terms: Any seller whatsoever will give to the bearer the goods or merchandise which he needs up to the value of three livres, as for other goods or merchandise, and bearing as signature the portrait of the prince or another public mark."
-- John Law "Lettre sur le Nouveau Système des Finances, 1720"
Like Law, Smith does not regard money as a durable good whose chief function is to store up for the future the value of goods and services sold; he completely forgets its function of saving, as Walras was to call it (which becomes more important as commercial activity increases); he ignores its function of providing a bridge between the present and the future, which is the part it plays at all times, and the most important part; he can see in it only a voucher to purchase in the present, an instrument for distributing goods, not a means of conservation. Hence that long and tedious chapter (Smith, Vol. I, p. 275) in which he tries painfully to explain that money is part of the capital and not the income of society, and which ends in the characteristic passage:
"Money, therefore, the great wheel of circulation, the great instrument of commerce, like all other instruments of trade, though it makes a part and a very valuable part of the capital, makes no part of the revenue of the society to which it belongs; and though the metal pieces of which it is composed, in the course of their annual circulation, distributes to every man the revenue which properly belongs to him, they make themselves no part of that revenue."
-- Adam Smith, Vol. I, p.275
If, indeed, metallic money is not income, if it is only a costly "instrument," then obviously any economy in its use is of advantage. But it is precisely here where the mistake lies.
Nevertheless, this idea was seized upon by with extraordinary alacrity and found high favour. Taken up by Ricardo and adopted by Count Mollien and J.-B. Say, it dominated the thought of English writers in the nineteenth century. The belief that the use of metallic money is a retrograde and costly system, to be discouraged by all possible means, is firmly fixed in British thought on currency and banking.
This is in harmony with the remarkable qualities displayed by the English as bankers. The art if utilising to the maximum the coin deposited with them, and of developing all methods of credit, has nowhere been carried so far as at London. But, in admitting their ability in this, the application of Smith's idea, held by so many after him, led the English to under-estimate the importance of a large stock of money to support a vast edifice of credit. The same conception was responsible for serious mistakes in English monetary policy, mistakes which were pointed out by such far-sighted writers Thornton and Tooke, and later Hartley Withers.
"History of Monetary and Credit Theory from John Law to the Present Day", Charles Rist
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