through interest rates-the price of credit.

With allowance
for the differences in interest rates due to varying degrees
of risk, competition for funds pushes interest rates beyond
the levels that conservative borrowers will payor inefficient
producers can afford to pay (in the long run). This tends to
direct savings and the real resources they can command into
their most productive uses.

The flow of savings and the way these funds return to

the income stream through creation of debt are shown in the
diagram on page 24. If any cn.<fnnel is cut off, future income
is reduced.

. a money creation function

Debt does more than simply transfer idle funds to where

they can be put to use-merely reshuffling existing money.
It also provides a means of creating entirely new funds-
I funds needed to finance the greater volume of new projects
s and spending that contribute to economic growth.
f
Again, checking accounts in commercial banks are bank
debts-liabilities of banks to their depositors. But deposits
are also the money used for most expenditures. How do these
deposit liabilities arise?

For an individual bank they arise typically when a

~e depositor brings in currency or checks drawn on other banks.
t- The depositor's balance rises, but the currency he holds or
the deposits someone else holds are reduced a corresponding
amount. The public's total money supply is not changed.
es
ed But a depositor's balance also usually rises when a bank
oy extends him credit-either by granting him a loan or by
bt, buying his securities. In exchange for the note or security,
ge the lending or investing bank credits the depositor's account
er- or gives him a check he can deposit at another bank. In this
case, no one else loses a deposit. The total of currency and
deposits-the money supply-is increased. New money has
1at been brought into existence by expansion of bank credit.
led Such newly created funds are in addition to funds that banks

23