I think David Beckworth is onto something important here. What looks like a balance sheet recession can in fact be caused by an excess demand for money.
The hairdresser cuts the hair of the manicurist, who does the nails of the masseuse, who massages the hairdresser. We have a Wicksellian triangle, with no double coincidence of wants. How can the three women coordinate their exchange of services?
1. Barter. All three women meet at once, and do a three-way barter deal to exchange services.
2. Money. Each pays money in exchange for services. Only two women meet at any one time. But if there is an excess demand for money, we get a monetary recession.
3. Credit. Each buys services on credit from the seller. Only two women meet at any one time. But the amount of credit grows over time. Eventually they reach a limit where they are unwilling to extend further credit, or unwilling to take on further liabilities, and we get a balance sheet recession.
4. Credit plus a clearing house. Each buys services on credit from the seller. But all three women periodically meet at once, to cancel out the circle of offsetting liabilities.
5. Credit plus money. Each buys services on credit from the seller. Periodically money circulates to pay off the circle of offsetting liabilities. Only two women meet at any one time. But if there is an excess demand for money, the circle of credits does not get paid off, and so eventually we get a balance sheet recession.
What lessons do we learn from this example?
First, we learn that credit is not a substitute for money. Only the combination of credit plus a clearing house is a substitute for money.
Second, we learn that credit plus a clearing house is like barter, in that it requires all three women to meet at once. Only money allows decentralised pairwise trades.
Third, as David Beckworth notes, what looks like a balance sheet recession can be caused by an excess demand for money. That same excess demand for money would cause a recession if there is no credit, or else cause a balance sheet recession if there is credit. We get a recession sooner or later in either case.
We should note one further thing. Money can facilitate trade even if there is no closed Wicksellian circle like in this example. Only money lets A buy from B, who buys from C, who buys from D, who buys from E,....in a never-ending chain. Barter, or credit plus a clearing house, cannot work if the chain never circles back to A, where it started. A might be dead by the time Z gets the money. The dollar never returns to the first person who spent it.