Against Savings: A Suggested Exposition of the Markets for Money and Credit

Abstract

The notion of savings in economics has a variety of mutually incompatible meanings. This paper goes through various interpretations of the term and argues that, for the sake of clarity, it can and should be replaced with more precise terms. In order to show the significance of doing so, the paper then offers an “augmented” loanable funds model. Unlike the standard model, which was developed in the context of unintermediated lending, our mode: 1) does not identify the supply of loanable funds with “savings”, and 2) explicitly connects the banking sector to the supply of money with something more theoretically robust than a simple money multiplier. The resulting construction clarifies the relationship between the markets for money and credit, and is more faithful to the image of banks as creators of credit, while still retaining the pedagogical simplicity of the original loanable funds model.