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Keynes' Inactive Balances, the Banking Sector and Effective Demand

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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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  • Christy Huebner Caridi, 2002. "Keynes' Inactive Balances, the Banking Sector and Effective Demand," SCEPA working paper series. 2002-07, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    • Handle: RePEc:epa:cepawp:2002-07
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    File URL: https://www.economicpolicyresearch.org/scepa/publications/workingpapers/2002/cepa200207.pdf
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    Keywords

    Keynes; fractional reserve banking; capital stock; time and savings deposits; inactive balances;
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