Savings and endogenous money supply

Abstract

According to the principle of effective demand which John M. Keynes
presented in his General Theory, investments are an active factor that determines
the level of savings, and thus also productivity, employment and national
income. In literature, a lot of attention is devoted to the analysis of this
causal relationship, but the question how investments are financed if savings

only result from them is usually left unanswered. The purpose of this article
is to show that the statement that savings are not necessary to fund investments
is based on the principle of endogenous money and the key role that
commercial banks (alongside entrepreneurs and households) play in Keynes’s
argument.
According to Keynes, conducting private investment projects has nothing
to do with prior savings, as these are commercial banks that already at the
planning stage are responsible for supplying financial resources to entrepreneurs.
By creating credit money, they ensure the continuity of the production
process in the economy. Banks themselves do not need to acquire deposits
from the public to be able to lend (as they do in the neoclassical model).
Credit money is created ex nihilo. Endogenous money supply lies at the heart
of Keynes’s idea of effective demand, supported by his concept of finance
motive and finance operating fund.