Theoretical reflections on endogenous money: The problem with 'convenience lending'

This paper questions the practice of representing the endogenous money supply by means of a 'horizontal' money supply curve, implicitly contrasted with the conventional 'vertical' (stock) supply curve. What is drawn as a horizontal curve is strictly a locus between a continually shifting stock curve and a shifting demand curve. Consequently, demand (for money) considerations have been suppressed in the 'horizontal' presentation. One response is that the resulting deposits are automatically held, through some process such as 'convenience lending'. However, the argument behind 'convenience lending' points to the conclusion that it is changes in relative interest rates that reconcile the demand for additional loans with the demand for additional deposits. (C) 1996 Academic Press Limited