Why the cash pile was not the whole story
In 1959, the Radcliffe Committee challenged a deceptively simple way of judging how much spending power an economy had: count cash and bank reserves, then treat that total as “money.” Those measures mattered, but they could miss credit—the ability of households and businesses to borrow and spend.
A firm might use a bank loan to buy equipment, or a household might borrow to make a large purchase, without first building up a matching pile of cash. If economists watched only a narrow money measure, they could overlook spending capacity that was already available through lending.
How a loan becomes spending power
When a bank makes a loan, it generally credits the borrower’s account with a deposit. The borrower can then pay a supplier or shop; the money moves through the banking system as the payment is made. The loan also creates a debt that must be repaid, but it gives the borrower a way to spend now rather than wait to save.
Credit can also come from outside banks, such as a business borrowing through financial markets. That means the economy’s capacity to finance purchases depends not just on the amount of currency in circulation, but on the routes available for obtaining funds.
The policy consequence
The report’s broader view was that monetary conditions could not be understood by tracking a single tally. Interest rates, lending terms, and borrowers’ access to finance all helped shape whether spending was easy or difficult. A policy change might affect activity by making loans more expensive or harder to obtain—even before a narrow measure of money showed much movement.
The practical lesson was a shift in what policymakers needed to watch: not only the money already in people’s hands, but also the credit that could put purchasing power there.
