Keynesstrongsstrong monetary theory of interest.pdf

Keynes’s monetary theory of interest Geoff Tily1 Abstract Now there is no part of our economic system which works so badly as our monetary and credit arrangements; none where the results of bad working are so disastrous socially; and none where it is easier to propose a scientific solution. (J M Keynes: speech to the Liberal Party, December 1923, The Collected Writings of John Maynard Keynes XIX, Vol I, pp 158–9) Keywords: Keynes, bank money, liquidity preference, long-term rate of interest, debt management policy, tap issue, capital control, international clearing union JEL classification: B22, E12, E43, E50, F30 1 UK Post Keynesian Study Group. E-mail: geofftily@. BIS Papers No 65 51 1. Introduction This paper examines the evolution of Keynes’s monetary theory of interest and associated policy mechanisms. The discussion draws heavily on and develops the approach of Tily (2010 [2007]), which details what are regarded as fundamental and grave misunderstandings of both his analytical approach and his policy approach. From a practical perspective, Keynes’s primary concern was the arrangement of domestic and international monetary systems to permit the full and stable utilisation of resources, and to prevent crisis, rather than the use of fiscal policy in the event of crisis. The theory of liquidity preference and practical policy to set the rate of interest across the spectrum are central to the discussion. But while these are the core of the discussion, it is positioned in a broader view of Keynes’s economic theory and policy. This strategy follows