Most of the criticisms made against the classical theory are valid also in the case of the loanable funds theory. In fact. there is not much difference in the classical and loanable funds theories. The difference lies only in the meaning of saving. In the classical theory. ‘savings’ is infact the same thing as the “loanable funds” of the loanable funds theory. In classical theory. savings mean savings out of the income of the previous period. In tl”e loanable funds the  loanable funds I ( consist of saving out of the income’ of; the previous period plus borrowed bank deposits’plus activated idle balances. In classical Language, savings out of current income may well exceed the savings of loanable funds theory. because current income is increased by bank loans or the injection of idle balances. Thus. the supply schedule of savings of classical theory amounts to the same thing as the supply schedule of loanable funds of the loanable funds theory. Further. the Loanable Funds Theory like the Classical Theory is indeterminate. According to this theory. the rate of interest is determined by the intersection of the demand curve for loanable fund with the supply curve. Now. the supply of loanable funds is composed of savings plus Bank credit and dishoarding. But ‘since the ‘savings’ part of the supply curve varies with the level of income. it follows that the total supply of loanable funds will also vary with income. Thus .•the theory is also indeterminate.


Share This