the system, can market forces ensure the non-expansion of credit (i.e. that the demand for loans equals the supply of savings)?
“essentially determined by expected profitability.” [Philip Arestis, The Post-Keynesian Approach to Economics, p. 103] This means that the actions of the banks cannot be taken in isolation from the rest of the economy. Money, credit and banks are an essential part of the capitalist system and they cannot be artificially isolated from the expectations, pressures and influences of that system. Let us assume that the banks desire to maintain a loans to savings ratio of one and try to adjust their interest rates accordingly. Firstly, changes in the rate of interest “produce only a very small, if any, movement in business investment” according to empirical evidence [Op. Cit., pp. 82-83] and that “the demand for credit is extremely inelastic with respect to interest rates.” [L. Randall Wray, Op. Cit., p. 245] Thus, to keep the supply of savings in line with the demand for loans, interest rates would have to increase greatly (indeed, trying to control the money supply by controlling the monet
