Prosperity and Depression.pdf

AnalYsis oj TheoriesPart IWe have (b) a monetary theory of the rate ofThe" loanable- intere~ which runs in terms of demand for andfund" theory supplr~loanable funds or credit or claims. Elaboofinterest. rate attempts have been made at reconciling andintegrating these two branches. In the Wicksellianand neo-Wicksellian literature-e.g., as reviewed above in Chapter 3-a detailed analysis is given of the mechanism by which, and theroutes through which, pecuniary surface forces realise or falsifythe fundamental relationship postulated by the " pure " theory ofinterest. One may very well hold that this integration has notbeen satisfactorily achieved, but one cannot say in justice that theproblem has not beeri recognised.The monetary theory ofinterestin terms ofsupply ofand demandfor loanable funds has to be regarded as a first approximation to amore elaborate treatment of the rtlatter. It has been presented inthe first edition of this book; it is the theory expounded byProfessor OH!:~N, as reviewed above in §2. ofthis chapter(page 183).It is, as Professor ROBERTSON puts it,'" a common-sense accountof events " which attempts to give "precision to the ordinaryview enshrined in such well-known studies ofthe capital and creditmarket as those of LAVINGTON 1 and HAWTREY, as well as in athousand newspaper articles ". 2This "common-sense" explanation of the rate of interest,and the more elaborate theory behind it, has been criticised byMr. KEYNES and .other writers. He has replaced it by a purelymonetary theory,. in which the rate of interest is completelydivorced from the demand and supply of saving and explainedinstead by means of the " liquidity preference schedule " and thequantity of money.81 The English Capita! Market, London, 1921 (3rd ed., 1934).2 Economic Journal, Vol. 47, page 428.I Professor J. R. Hicks, too, in his book Value and Capital (whichappeared-Oxford, I939-wben this edition was already in print)distinguishes between" real capital" theories Qf interest and" loanablefunds" theories (page 153). He calls this a" serious division of opinion"which marks a" real dispute ". "But the real dispute has lately beencomplicated by a sham dispute within the ranks of those who adhere tothe monetary approach. " This refers to the dispute between Mr. Keynesand his followers on the one hand, and the demand-for-and-supply-ofloanable-fundstheorists on the other hand.