Working Paper No. 438 | January 2006

Keynes's Approach to Money

An Assessment after 70 Years

This paper first examines two approaches to money adopted by John Maynard Keynes in his 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 his 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.

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