Translated from the French by Tim Gupwell

The question of whether a debt contract can be considered as money is central to my book L’argent mode d’emploi (2009). I expose the violence exerted by Joseph Schumpeter (1883-1950), when he imposed the idea that such was the case, and I demonstrated the inanity of the pseudo-arguments that he advanced – employing phrases that often lacked any sense – to support the idea (p. 175 – 180).

A debt contract is indeed another form of money according to Schumpeter, and its amount can be added to that of money in order to calculate the “monetary masses” which constitute the wealth present in the financial system.

The issue can be considered as a purely academic one, a mere question of definition. However, in reality this is far from being the case. When a debt contract can no longer be exchanged for the amount which it was supposed to pay back – because a doubt has arisen as to whether the promised money will be returned or not on the stated day – the dominant economic “science”, that is ‘Schumpterian” economics, prefers to talk of a “lack of liquidity”: a temporary difficulty in converting the ‘money’ which a debt contract represents into actual money, in other words a purely technical problem in the fluidity of the markets.

This confusion between money and debt contracts was what was necessary to allow the systemic risk which underlies the ‘leverage effect’ to be ignored, namely comparing the gains made from interest paid on borrowed money (corresponding to a debt recognition), rather than on money in the strictest sense of the word.

A few us from 2007 onwards insisted on the fact that that the burgeoning crisis was an crisis of insolvability: that there was not enough money around to honour the debt contracts, and that invoking the idea of liquidity was merely a means of masking the gravity of the situation. This also was more than just an academic debate.

That said, the confusion continues. In the Financial Services Authority’s Final Notice, dated the 27th June 2012, in which the British regulatory authority explains the reasons behind the 85 million Pound fine (reduced to 59.5M£ for co-operation with the enquiry) imposed on Barclays bank for its role in the LIBOR affair, the word ‘liquidity’ appears in several places where just the word ‘solvability’ would have been justified:

“Liquidity issues were a particular focus for Barclays and other banks during the financial crisis and banks’ LIBOR submissions were seen by some commentators as a measure of their ability to raise funds…… The media questioned whether Barclays’ submissions indicated that it had a liquidity problem.” Etc. (p.3)

The global collapse of the financial system, the inevitability of which is underlined once more by the LIBOR affair, could have been prevented had there not been this confusion of money with debt contracts, and consequently, of insolvability with illiquidity. Five years later, it is, of course, far too late to lament as an error what economic ‘science’ had hailed in its time as a stroke of genius from Joseph Schumpeter.