2.2 Credit and deposits, investment and savings. Primary and secondary credit
/20/ Both NCT and MMT, as well as most post-Keynesians, hold that credit creates deposits and not the reverse. This is in accordance with the bank-credit theory of money (3.3). Bank credit is not funded by on-loaning customer deposits. Banks do not in fact operate on the basis of customer savings or time deposits. Banks need to have liquid assets, i.e. excess reserves and vault cash. Liquidity is the key. Customers' savings and time deposits, by contrast, are a liability and not an asset of a bank. They represent deactivated demand deposits, i.e. bank money (demand deposits) taken out of circulation. This does not add to the liquid assets of a bank. However, it shields a bank from the liquidity risk of unforeseen outflows and resulting defaults on reserves and cash.
There is a distinction between primary and secondary credit. Primary credit creates fiat money; secondary credit lends such money on. In the present system there are two different sorts of primary credit: central-bank credit, which creates reserves, or their equivalent in cash, and bank credit, which creates demand deposits. Central-bank credit is created 'out of nothing' and bank credit 'almost out of nothing' since there are fractional reserve necessities, as will be discussed further below. Central-bank credit is thought to rank above bank credit; in everyday practice, however, bank credit is pro-active and fractionally re-financed through re-active central-bank credit.
When a demand deposit in M1 is deposited in M2/M3, thus becoming non-available at short notice, this does not represent secondary on-lending but deactivating of deposits at low interest, allowing for and actually necessitating additional bank credit at higher interest. Banks in point of fact never on-lend customer deposits: they simply cannot, for technical reasons (split circuits). Banks always create primary credit. 'Bank lending', as Fullwiler/Kelton/Wray put it, 'is never constrained by the deposits that flow into banks – since banks create deposits when they lend'.
/21/ When, though, customers grant a loan to other nonbanks, or invest their demand deposits in capital funds or directly in shares and securities of any kind, this represents secondary credit (which technically nevertheless involves re-activation of de-activated demand deposits). A transfer of deposits through nonbank secondary credit can serve to fund primary uses, for example when they absorb a certain part of initial public offerings of stocks or bonds. Most often, however, secondary credit flows into secondary, literally 'second-hand' paper investment.
Primary credit creates deposits, and banks neither need deposits nor in fact can use them to make out credit. If savings have an important role to play, it is in obtaining rather than in funding primary credit. Debtors need to be seen as creditworthy and solvent, and the main criterion of creditworthiness and solvency is to possess valuable assets which can serve as collateral. The collateral, however, does not fund a credit but just stands bail for it. As a result, an economy basically does not need savings to be able to invest. Investment can be pre-financed on the basis of credit and deposit creation 'out of nothing'. Some of the earned income or interest-borne income resulting therefrom can then be converted to savings. Macroeconomic modelling which includes 'investment = savings' as a core component is inadequate in this respect.
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 Mosler 1995 11, Werner 2005 189, FKW 2012
pp1–4, Ryan-Collins/Greenham/Werner/ Jackson 2012 12–14.
 Schemmann 2011b pp30.
 Fullwiler/Kelton/Wray 2012 2.
 Werner 2005 192, pp174, Huber 2013 51–53.