Horizontalism: a critique

TLDR: In this paper, it is argued that banks' liquidity preference influences their responsiveness to the demand for credit and that rationing in the sense of adverse changes in risk assessment occurs systematically in the downturn of the business cycle.

Abstract: This article offers a critique of the horizontalist view of money that banks are passive in the face of credit demand. It is argued that banks' liquidity preference influences their responsiveness to the demand for credit. Their liquidity preference is expressed in risk assessment (understood in terms of John Maynard Keynes's theory of uncertainty). It is argued that rationing in the sense of adverse changes in risk assessment occurs systematically in the downturn of the business cycle. Systematic rationing also occurs with respect to particular classes of borrowers; the focus here is on the case of small firms. (c) 1996 Academic Press Limited Copyright 1996 by Oxford University Press.