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The Theory of Liquidity Preference and Debt-Management Policy

In: Keynes’s General Theory, the Rate of Interest and ‘Keynesian’ Economics

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  • Geoff Tily

Abstract

The previous chapter explained the importance of the macroeconomic identity between saving and investment. Logically, the next step in the discussion of Keynes’s theory is the theory of liquidity preference — the central monetary innovation of the General Theory. In this theory, Keynes turned his attention from money as a means of exchange to money as a store of value. His analysis led him not only to the theoretical treatment of uncertainty and expectation, but also to practical conclusions of the most profound importance. Ultimately, the theory turned classical analysis on its head. The rate of interest was the cause, not the passive consequence, of the level of economic activity. Moreover, as a quantity that depended on expectation, the authorities — if they so desired — had full control of the rate of interest that prevailed in a national economy. This control depended on the monetary, debt-management and international financial policies that were outlined in Chapter 3.

Suggested Citation

  • Geoff Tily, 2007. "The Theory of Liquidity Preference and Debt-Management Policy," Palgrave Macmillan Books, in: Keynes’s General Theory, the Rate of Interest and ‘Keynesian’ Economics, chapter 7, pages 183-225, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-80137-0_7
    DOI: 10.1057/9780230801370_7
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