Money, Banks and Finance in Economic Thought

The role of banks in crisis occurrence: interpretations from Irving Fisher and Joseph Schumpeter

Coulibaly Timothée, Université de Bourgogne Franche-Comté
Matthieu Llorca, University of Bourgogne Franche-Comté

Since the 2008 global crisis, interaction from financial factors to economic activity is widely studied in economic literature (Morley, 2016). Money neutrality, defended by the mainstream monetary theory, dominated the debates before such crisis. Moreover, the role of financial intermediary, as presented by the modern theory of financial intermediary (Diamond and Dybvig, 1983; Gorton and Winton; 2003) simplifies the effect of financial variables on economic activity. Banks are considered as simple financial intermediaries converting short-term assets (deposits) in long-term assets (credits). In this framework, monetary creation from banks is scarcely analysed. However, such role is stated by numerous authors from the first half of the 20th century (Schumpeter, Keynes, Hawtrey, Hayek, Fisher…).. We propose in the paper to focus on the lessons from Irving Fisher (1911, 1932) and Joseph Schumpeter (1939) to interpret banking crisis occurrence. Indeed, these two authors have an analysis of the functioning of the bank quite similar. However, Fisher studies the role that bank should player to achieve the monetary stability whereas Schumpeter gives to bank an essential role in the process of economic evolution. Economic cycles and crisis result from real activity. Schumpeter advocates the importance of bank in financing entrepreneurs on their innovative projects, whereas Fisher considers bank as the source of monetary problems in economies. When banks grant credit at a level higher than their deposits, they contribute to economic booms and busts.

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Keywords: Bank; Crisis; Fisher; Schumpeter

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