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I was at an economics presentation a few days back.  It was one of those things where the speaker had the audience all terrorized and running scared from the national debt, the current size of the deficit and waxing poetic about the budget surpluses generated by the Republican Congress in the late 90’s.  One of the things he said stood out at me:  “The Government can create jobs, but it can’t create wealth.”  I took a moment to assess that statement, and began thinking about vertical and horizontal money.

Bank Credit is what is termed by Chartalism as “horizontal money.” ( This is really a Post-Keynesian concept developed by Basil Moore)  That is to say, when bank credit is created, there is an asset and a liability that are equal.   So within the private sector (Banks, Businesses and Households), when bank credit is created, no “net” financial assets are found or created.  There is no equity.  One person’s asset, or savings, is equal to another person’s debt.

Government spending, however, is “vertical money,” that is, it is dropped into the private sector without a corresponding liability in that sector.  A Government liability adds net financial assets, or equity, into the private sector.  Most people think that Government debt is a liability of the private sector.  This is false.  In fact, it’s just the opposite.  Government debt is an asset of the private sector entity which holds it.

By spending into the economy, the Government “creates wealth.” It creates savings in the private sector which would be absent in a purely private credit economy.  Of course, the Government doesn’t determine the distribution of that savings other than it’s initial expenditure.  Where it ends up is a function of spending and savings decisions by private sector actors.

So it’s important to remember that the overall savings of the private sector will exactly equal the Government overall deficit (total debt).  This is vertical money.  Any other savings which is created by the private sector will be dis-savings of another private sector entity.  This is horizontal money.  It’s a critical concept for understanding our money system.

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