THE POST KEYNESIAN THEORY OF BANKING AND THE ENDOGENOUS MONEY SUPPLY

This paper seeks to contribute by presenting an assessment of the relevant literature on banking and the endogenous money supply. The focus is placed on the Post Keynesian per-spective, though traditional approaches are briefly discussed as well. The paper argues that, due to scope economies, banks are mistakenly confused with financial intermediaries; a common finding in the traditional literature. This is not the case of both the Post Keynesian view and the Circuit approach. Those perspectives, on the contrary, by reversing the causal link implied by the quantity theory of money, the base-multiplier and the saving-investment cycle as well as by focusing on a flow-perspective of money and on the asset side of banks’ balance sheets, are both able to explain the core of the banking business and, hence, the very nature of the endogenous money supply. The paper shares the view of Screpanti (1997) for whom “…Banks make the generic credit risk saleable”. They transform risky, illiquid, nonmarketable assets based on personal credit into safe, liquid, and marketable bank de-posits which are socially perceived as money. The paper considers as well the major diver-gence among the Post Keynesian Horizontalist approach and the Post Keynesian Structuralist or Partial Accommodation approach; namely the exogeneity of the interest rate. Here, as in Screpanti (1997) and Wray (2004), such a divergence is assessed rather as the result of an imprecision in the definition of time horizons, or as a misinterpretation of the im-pact of cyclically increasing risk upon the determination of mark-ups and bank rates