More On Horizontalism

Horizontalism, Endogenous Money and ideas such as that were brought into Macroeconomics by Nicholas Kaldor. In [1] he wrote

Diagrammatically, the difference in the presentation of the supply and demand for money, is that in the original version, (with M exogenous) the supply of money is represented by a vertical line, in the new version by a horizontal line, or a set of horizontal lines, representing different stances of monetary policy.  

Loans Make Deposits. Deposits Make Reserves

In 1985, Marc Lavoie [2] coined the phrase Loans Make Deposits and Deposits Make Reserves. In the article Credit And Money: Overdraft Economies, And Post-Keynesian Economics, he says:

Orthodox monetary economics is founded on the double entry hypothesis of free reserves and the credit multiplier Each individual bank may only increase its loans to the public when depositors increase their balances there, i.e., when free cash reserves augment for that one bank. In the aggregate, commercial banks are allowed to make supplementary loans when they dispose of free reserves. The latter can be obtained through modifications of the behaviour of the public, as a result of a surplus in the foreign account, as a consequence of the intervention of the central bank on the open market, or following a change in the reserve requirements. Although the credit multiplier functions on the basis of an expansion of credit, deposits make loans in the orthodox context. The usual sequence of events is as follows: the central bank buys some security from a member of the public; the deposits of this person are increased; the bank which benefits from these increased deposits now disposes of excess reserves and can make new loans …

… The credit-money view rejects this approach to money and inflation by reversing the sequence of events. According to the unorthodox view, loans make deposits. Banks do not wait for the appropriate amount of liquid resources to exists to provide new loans to the public (mainly firms). Credits are created ex nihilo. The recipient of the purchasing power is the initial recipient of the loan. When the bank makes a new loan, the borrower is being immediately credited with a deposit, the amount of which is exactly equal to the amount of the loan. Hence, the increase in the supply of money is a consequence of increased loan expenditure, not a cause of it. The loan is the causal factor …

… Once commercial banks have created credit money, how do they get hold of the reserves required by the newly created deposits or how do they obtain the currency cash requested by the public? In many European banking systems, France in particular, commercial banks simply borrow their requirements in high-powered money. Most banks are permanently indebted to the central bank. The money market in those circumstances does not play a fundamental role. When banks, overall, are in need of more high-powered money, they increase their borrowings with the central bank at the discount rate set by the latter. Legal reserve ratios, when they do exist, are not used to control the created quantity of money. They exist to increase the cost of the loans granted by the banks since reserves carry no interest revenue …

… It is often claimed that the North American and German banking systems function in quite a different way. This however is an illusion. Although institutional arrangements are quite dissimilar, the expansionary process of credit is the same… First… banks grant legally binding lines of credit which imply future access to reserves. Second, North American banks must respond to lagged required reserve-accounting conventions. Third, banks always have access, although limited, to the discount window of the central bank.


  1. Nicholas Kaldor, Keynesian Economics After Fifty Years, p22, Keynes And The Modern World, ed. George David Norman Worswick and James Anthony Trevithick, Cambridge University Press, 1983.
  2. Marc Lavoie, Credit And Money: Overdraft Economies, And Post-Keynesian Economics, pp 67-69, Money And Macro Policy, ed. Marc Jarsulic, 1985. (Available at UMKC’s course site)

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