The Bank as a System and Credit Creation

Abstract

The main function of the capitalist credit system is to create additional purchasing power in advance of future reflux of money, that is, credit creation. Commercial credit is the most fundamental form of credit creation, but it has the restrictions by individual situations, such as the sum of money due, the terms of payment and the acceptability of a bill. Banking credit is the capitalist social mechanism that overcomes the limitations of commercial credit, and realizes constant and overall credit creation. An individual bank, however, will be exposed to liquidity risk as well as credit risk, by responding to various requests based on many individual situations. This paper shows that the liquidity risk of banking credit is not actualized under the following conditions. 1) The banking system which has the mechanism of bill clearing and settlement, and of inter-bank lending or rediscount, is systematized. 2) The banking system is carrying out inclusion of the whole social reproductive process. 3) The social reproductive process is smooth and favorable. Under the conditions, bank liabilities, banknotes and deposits, which banks create in the course of bill discounting, circulate as means of purchase and payment, achieving the function as reserve that idle money has accomplished.