The Source of Endogenous Money

In the posl-Keynesian approach to money, endogeneity has its origin in the demand for Ioans which in turn arises from frms' requirementsfor worhng capital whenever the cost and/or volume of planned output increases. Banl<s meet all creditworthy demand for loans and the central bank supplies lhe necessary reserves. Thus, bank lending (and the supply of new deposits) depen & critically upon the 'state of trade'. However a number of institutional changes have recently taken ploce.in the UK which call this sequence into question- Household demand has taken over from corporate demand as the major component in the aggrcgate demand for bank credit. Furthermore, we bzow that total transactions (including those on assets, intermediale and secondhand goods) have grown much more rapidly than GDP during the 1980s. If credit is required for all types of transactions, we might therefore acpect the demand for loans to depend more directly on tolal transactions than on those rclated to outpul alone. This paper docwnents those institutional changes and considers some of lhe implicafions. I. hrboduaion The endogeneity of credit and money is central to the Post Keynesian view of the macroeconomy. Until now, dre source ofthe endogen€ity has alwals been identified as the costs and the volume of production. The behaviour of nominal output determines the demand for credit. The central bant sets the rediscount rate and commercial banks meet the whole of the creditworthy demand for loans at the rediscount rate plus a risk-related mark-up. The new loans create new deposits. The importance of nominal output as the origin of the demand for loans is ofien summarised by salng that loan demand is created by the 'state of trade'. We may take the following as typical. The single most important demand for credit is fron business firms. Companies bonow frmds short-ierm from banks primarily to meet their needs for increased working capital. This need arises because companies must pay their factors of production, in particular labor, before they receive the sales receipts from the goods and services produced, which take time to manufacture and sell. (Moore, 1988, p.373) Similar statements can be found in Davidso