COMMERCIAL BANKS AS PURE INTERMEDIARIES*

Abstract

A long-standing debate in monetary economics concerns role of commercial (demand-liability creating) banks in saving-investment process. According to New View, commercial banks are pure intermediaries: they act as brokers of, rather than creators of, loanable funds and are not an independent cause of investment in excess of ex ante saving. In words of Gramley and Chase [12, 1385], the quantity of deposits a bank sells depends on willingness of public to purchase its Since this is true for each and every bank in system, constraint on bank deposits-and hence on bank asset holdings-is derived from public's desire to hold bank deposits. Changes in nominal supply of bank money are therefore responses to prior changes in public's demand for balances of bank money. According to Old View, commercial banks do create loanable funds and are capable of causing investment to exceed ex ante saving: as Yeager [34, 49 and 51-52] puts it, there is no problem of [banks] lending and spending new demand deposits into existence. No one need be persuaded to invest in them before they can be created. . . . people's initial unwillingness to hold all newly created actual money would not keep them from accepting it and would not prevent its creation. Changes in supply of bank money are matched by changes in demand only in long-run, by way of changes in price level.' Of these two views new view is more controversial, and in eyes of