6 - From the corn economy to the monetary economy

Summary

The essential difference between a corn economy and a monetary economy is that in a monetary economy, banks do not actually have to give out seed to borrowers. They lend, creating a “deposit” which the borrower can use to obtain seed on the market. The deposit is, in effect, a “certification of credit worthiness.” The bank bears the risk of the borrower not repaying. Anyone who supplies seeds to farmers will be more willing to accept these certifications than to provide credit directly to the farmer himself. It is this certification which facilitates the transaction between the borrowing farmer and the seed supplier.

There are three problems posed by moving from the simple corn economy to the monetary economy with certifications. First, what ensures that the supply of these “certifications” will be equal to the supply of seeds on the market? Indeed, the fundamental macro–economic problem arises from the fact that it can be either greater or less than that number. Second, why is the process of screening linked to the process of banking? In principle, the bank's information services/activities could be separated from its lending activities. Why is that not more prevalent? And third, what is the role of public regulatory policy? While a fuller analysis of regulatory policy is postponed to part II, it is worthwhile at this juncture explaining the rationale for such policies.