Keynes' Inactive Balances, the Banking Sector and Effective Demand
This paper offers a fresh look at the economic theories advanced by Keynes. Keynes correctly asserted that in a fractional reserve banking system supply could not create its own demand when agents held time and savings deposits as a longrun store and entrepreneurs were engaging in the disinvestment of capital. There are two fundamental problems. The first, disinvestment creates a disjoint between ex-ante supply and current period income; the second, the banking sector cannot transfer real resources, therefore, it cannot intermediate savings. Thus, the economy requires demand injections, financed by bank debt, if it is maintain economic activity.
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