Keynes' inactive balances, the banking sector and effective demand

The Hypothesis of the paper is that John Maynard Keynes was correct when he stated that non-transaction deposit liabilities in the banking system were inactive. With reference to pre 1936 literature the paper creates a logical reconstruction of the development of money, the purpose of money, money as purchasing power, money as wealth, the relationship of commodity money to banking and the relationship of banking to activity in the real economy. Special emphasis is placed on the token status of bank redit money and the relationship of token money to real flows. This is followed by a discussion that outlines where money is required in a capitalist economy. With the information thus secured, the paper takes a systematic look at inactive balances in an economy where the only intermediary is the banking system.;There are three key points exposed in the paper: inactive balances are prior period wealth, the banking sector can not transfer resources, i.e. wealth, and prior period wealth is required to validate the disinvestment of capital. Specifically, without a demand injection, the disinvestment of capital will create a contraction in aggregate demand.;The above summary points when coupled with the relationships of saving to investment and wealth to the disinvestment of capital prove that Keynes' assertion is correct when the only intermediary is the banking system. Money wealth held in non-transaction deposit liabilities is inactive: where inactive is formally defined as wealth not available for current consumption or the preparation of future consumption.;In the final stage of the analysis, Keynes' proposition was applied to an economy where non-bank credit coexists with bank credit money. The conclusion is that non-bank credit introduces a degree of freedom into the system, but that Keynes' assertion continues to hold. Money wealth is and always will be inactive.