Keynes: “The Essential Properties of Interest and Money”

In 1947, Keynes’s biographer, pre-publication critic and collaborator R. F. Harrod summed up the General Theory as follows: The theory of interest is, I think, the central point in his scheme. He departs from old orthodoxy in holding that the failure of the system to move to a position of full activity is not primarily due to friction, rigidity, immobility or to phenomena essentially connected with the trade cycle. If a certain level of interest is established which is inconsistent with full activity, no flexibility or mobility in the other parts of the system will get the system to move to full activity. But this wrong rate of interest, as we may call it, is not itself a rigidity or inflexibility. It is natural, durable, and in a certain sense, in the free system inevitable. That is why he lays what may seem an undue emphasis on the doctrine that interest is essentially the reward not for saving but for parting with liquidity. Given the complex forces affecting liquidity preference, such and such is the rate of interest that will naturally and necessarily and, so long as underlying forces remain unchanged, permanently obtain. Yet that rate of interest may be inconsistent with the full activity of the system.