Keyne's Approach to Money: An Assessment after 70 Years

Abstract

This paper first examines two approaches to money adopted by Keynes in the General Theory (GT). The first is the more familiar "supply and demand" equilibrium approach of Chapter 13 incorporated within conventional macroeconomics textbooks. Indeed, even Post Keynesians utilizing Keynes's "finance motive" or the "horizontal" money supply curve adopt similar methodology. The second approach of the GT is presented in Chapter 17, where Keynes drops "money supply and demand" in favor of a liquidity preference approach to asset prices that offers a more satisfactory treatment of money's role in constraining effective demand. In the penultimate section, I return to Keynes's earlier work in the Treatise on Money (TOM), as well as the early drafts of the GT, to obtain a better understanding of the nature of money. I conclude with policy implications.

Keywords: Keynes's General Theory, money supply and demand, liquidity preference, finance motive, endogenous money, credit money, state money

JEL Classification: E12, E41, E43, E51