A Monetary Theory of the Rate of Interest

  • Gordon A. Fletcher
Part of the Keynesian Studies book series (KST)


In approaching Keynes’s own theory of the rate of interest, there are four points to be kept in mind. The first is that Keynes was driven to seek a new explanation of interest once he realised that classically based theories were involved in logical error and had to be replaced. The second is that in a monetary economy the rate of interest is a monetary phenomenon and derives from the uniqueness of money. The third is that because of its monetary nature the rate of interest exerts a powerful regulatory influence on the level of economic activity. The fourth is that while on a purely mechanical level the interest rate is proximately determined by the available stock of money and the aggregate demand for money, this is so only on the understanding that ‘all influences other than the amount of money are portmanteaued in the liquidity function’.1


Market Rate Capital Asset Monetary Economy Future Consumption Money Stock 
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Notes and References

  1. 2.
    J. M. Keynes, ‘Alternative Theories of the Rate of Interest’, Economic Journal (June 1937), in Keynes, CW, XIV, p. 212.Google Scholar
  2. 9.
    Keynes, General Theory, pp. 137, 140, 184; see also, Keynes, ‘The General Theory of Employment’, Quarterly Journal of Economics (1937), in CW, XIV, pp. 122–3.Google Scholar
  3. 19.
    Keynes’s reference is to A. Marshall, Principles of Economics, 6th edn, (London: Macmillan & Co., 1910) p. 583, n. 1, but the page reference is identical in the 8th edn.Google Scholar
  4. The references there given are to E. von Böhm-Bawerk, Positive Theory of Capital (1889), bk. V, ch. 4, p. 261, and bk. II, ch. 2, p. 84, respectively.Google Scholar
  5. 42.
    See, for example, R. F. Harrod, Money (London: Macmillan, 1969) p. 149. Current output is small in relation to the existing stock.CrossRefGoogle Scholar
  6. A better example would be the effects, shown in spiralling interest rates, of the need of institutions to balance their books in a money market not directly supported by official smoothing operations; for instance, the London interbank market in sterling funds.Google Scholar

Copyright information

© Gordon A. Fletcher 1989

Authors and Affiliations

  • Gordon A. Fletcher
    • 1
  1. 1.The University of LiverpoolUK

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