ABSTRACT
In his comment on Mr Brand’s memorandum regarding the need for a bridging chapter between the two major sections of the Committee on Finance and Industry Report, Keynes is explicit in stressing the role played by the rate of interest in his analysis of economic recession. In particular, he maintains that ‘[w]e cannot possibly recover normal prosperity … until the market rate of interest and the natural rate (meaning by this the rate at which the world’s savings would be just absorbed) are brought together instead of standing a long way apart’ (Keynes 1981: 272-3). The British economist is thus taking over the central elements of the analysis developed more than 30 years earlier by Wicksell and whose origin may be traced back to Ricardo. The main idea is that price stability rests on the convergence between money and the natural rate of interest, the latter being determined by the ratio between ‘the amount by which the total product (or its equivalent in other commodities) exceeds the sum of the wages, rents, etc., that have to be paid out’ (Wicksell 1965: 103) and the total amount of capital invested in production. Wicksell’s problem is how to explain monetary disorder in a system in which ‘there is no apparent reason for any alteration in the general level of money prices’ (ibid.: 105). His analysis is based on a solid grasp of the banking system and on the clear understanding that ‘[m]oney is continually becoming more fluid, and the supply of money is more and more inclined to accommodate itself to the level of demand’ (ibid.: 110). But, if monetary disorders are not caused by money supply being distinct from the demand for money, can we nevertheless explain the existence of a positive gap between total demand and total supply? In the case of deflation, for example, how can a fall in the general level of prices be brought about, ‘it being assumed that money is obtainable in any desired quantity on terms which correspond to the real advantages entailed in the use of credit’ (ibid.: 105)?
