Ninety per cent of the monetary supply in the United States is comprised of credit. Cash is mostly around for convenience. Credit, then, is the important component of money. So, what is credit?

The principal things that a man can do with the product of his labor are: (1) he can consume it, (2) he can give it away, (3) he can save it, (4) he can lend it. Should he choose to lend a portion of the product of his labor, he may do so to another individual, to a corporation or municipality by buying their bonds, or to a savings and loan association or bank simply by making a deposit. Real credit (as distinguished from artificial credit created by the banking system or the government) is, therefore, simply a portion of the product of a man’s labor that he is willing to lend to his fellow man at prevailing prices (interest rates).

In a sense, credit can be considered a commodity. When it is scarce and the demand for it is high, interest rates would be expected to rise. Conversely, if there is a lot of credit looking for borrowers, interest rates would be expected to fall. Conditions of tightness and ease thus disappear quickly, if private transactions of borrowers and lenders are allowed to influence interest rates and keep economic balance between the supply of and demand for credit.

Why is it that conditions of easy bank credit persist for such a long time? The answer is that the banks -the largest merchants of credit-are not allowed to operate under completely free market conditions. Over long stretches of time, interest rates are kept artificially low so that the biggest borrower of all, the government, can finance its deficits at low cost. With interest rates at artificially low prices, marginal producers are encouraged to borrow, and the country is threatened with a runaway business boom. When this leads to fear of a bust and its political consequences, interest rates are allowed to seek their own level, which they are now doing. Then bank credit is said to be “tight.”

Actually, bank credit would be considered “tight” by two types of potential users. First, there are those who could borrow at free market interest rates, but whose collateral or credit rating is not sufficient to acquire credit at artificially low interest rates. So, in this sense, there is really no such thing as”tight money”-only “tight money” at artificially low interest rates.

Secondly, there are those who feel they cannot afford to borrow at current interest rates, but who would be willing borrowers if interest rates were lower. They might speak of money as being tight. But those of us who don’t own yachts would be equally justified in talking about a “tight yacht market,” simply because yachts are priced beyond our means.

As we have seen, “tightness” is suffered either by those who can’t afford credit at current interest rates, or by those who are willing to borrow at free market interest rates but are eliminated as marginal risks at artificially low interest rates. The only cure for unreasonable tightness, then, is a permanently free market for all credit. This would encourage more people to lend their savings to others, thus alleviating the artificial scarcity of funds to be loaned. []