ABSTRACT
Although Meade's analysis of the identity between investment and saving was an important contribution to the development of The General Theory, it suffered from two significant weaknesses. First, the propensity to save was held to be constant for all rounds ofthe process. This was not simply a heuristic assumption by Meade, but was essential ifhe was to use the formula for the sum of a geometric series in order to obtain his result. This raises a question whether perhaps the relationship holds only in this special case. Second, Meade's analysis did not address the matter ofthe financial flows associated with the investment expenditure and saving. This left a critical gap in the theory, for if investment is not financed by savers making available their 'free capital' for transformation into 'fixed capital' - as Marshall (1920: pp. 62-3) had put it - but instead the voluntary saving takes place after the expenditure on fixed capital formation, how then is that expenditure initially financed? Keynes addressed the first ofthese weaknesses in Chapter 7 of The General Theory and the second in two articles published in the Economic Journal the following year. The chapter in The General Theory explained how investment expenditure must lead to an equal amount of voluntary saving under any circumstances, whereas the two 1937 articles analysed the role of credit granted by the banking system in financing investment expenditure. The latter analysis is known as Keynes's theory of the revolving fund of investment finance. It is particularly interesting for endogenous money theorists, because the model integrates money into the real economy in a way that is more realistic and insightful than can be found in exogenous models such as Hicks's (1937) IS-LM translation of The General Theory. In this present study, Keynes's theory of the revolving fund is an important step towards the finance theory of inflation that will be presented in Chapter 7.
