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- W623800658 abstract "Monetary circuit theory assumes that the money supply is endogenously determined by the banking system. Money is provided by banks through loans and overdraft facilities demanded by firms (and households) undertaking real sector activities. Within monetary circuit theory money is only considered as a means of payment, not as a store of wealth. Keynes’s important distinction in his Treatise on Money between industrial and financial circulation seems to have been lost. Industrial circulation is the part of bank credit that goes to firms and households for current business related to production and consumption, that is, the focus of monetary circuit theory. Although financial circulation is an important part of the banks’ balance sheet in the form of savings deposits, this is hardly discussed in monetary circuit theory. In this paper, we shall argue that monetary circuit theory would be more coherent if it were expanded to incorporate some aspects of Keynes’s view on financial circulation. In a modern context, it has become apparent that it is financial circulation which contributed significantly to the inflated asset bubble in the first place and the credit crunch in the second round. Hence, bank lending, which creates means of payment, should be regulated closely to prevent asset bubbles. Banks’ activities, notably the creation of means of payment, should be restricted to credit for real activities only. Highly liquid stores of wealth do not have to be means of payment. Hence, banks should be divided into two categories: industrial banks, where deposits are used as means of payment (and no interest is paid), and financial banks, where deposits carry an interest, but cannot legally be used as means of payment. This regulation of banks would limit the amount of means of payment to what is required for production and trade, and would thus increase economic stability. This insight can be obtained by a combination of monetary circuit theory and Keynes’s analysis of industrial and financial circulation in his Treatise on Money." @default.
- W623800658 created "2016-06-24" @default.
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- W623800658 date "2009-01-01" @default.
- W623800658 modified "2023-09-24" @default.
- W623800658 title "Reconsidering Keynes in perspective of monetary circuit theory : the lost distinction between industrial and financial circulation of money" @default.
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