I am reading some early Post-Keynesian literature for a research project. Marc Lavoie (1992, 439) writes:
Furthermore, according to Le Bourva, money enters the econonomic system through the activity of production rather than exchange. […] This leads to a view of the economy based on the ‘total prefinancing’ of production …
In brief: producers want to produce, and to start production they need money. They don’t have money, or not enough, and hence they borrow money. With that money they pay for inputs, including labor, which sets into motion a monetary circuit.
Compare that to Ayn Rand’s writings, much favored by Alan Greenspan. This is an excerpt of Atlas Shrugged:
“So you think that money is the root of all evil?” said Francisco d’Anconia. “Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?
I see some confusion, because she talks about exchange. As a Russian emigré, she probably had no idea how the US monetary system worked (nor the Russian one). So, she would not know how money is ‘born’. Without this understanding how money is ‘born’ her whole monetary theory was nice and simple – too nice, and too simple to be true. Money is born as debt, when credit is given to government or the private sector (household and firms). This was also recognized by economists like Schumpeter, who belongs to the Austrian school. Rand is confused but with a little bit of XXI century help her sentence:
Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them.
… could be changed to …
Money is a tool of debt, which can’t exist unless some entrepreneurs (public or private) borrow money so that there are goods produced and men able to produce them are paid with that money, which they can exchange against goods.
And that would have been correct. So, our economies are driven by those borrowing money. As the statistics of the European Central Bank show (table 2.3 on page S14), money has lately been created to a large extent by households borrowing to buy houses, not by businesses to build investment projects. And that is where the problem is in Europe. With falling house prices and expectations of continued falling house prices, why should people buy a house – by taking a mortgage – now? And so they don’t, and so there is less money created, and less production, and less exchange, …