Keynes’s ‘Revolving Fund of Finance’ and Transactions in the Circuit

Abstract

Keynes's primary motivation in writing "Alternative theories of the rate of Interest" and "The "ex-ante" theory of the rate of interest" was to counter attempts by Ohlin and others to recast his liquidity preference theory as no more than a supply and demand model of the determination of the rate of interest. This rearguard action was ultimately unsuccessful, given the profession's ultimate acceptance of Hicks's IS-LM analysis as a summary of the General Theory. However, it also had a positive outcome, as tussling with Ohlin's arguments led Keynes to propose that investment finance was "an additional demand for money" (Keynes 1937b: 247) to the General Theory's triumvirate of transactions, precautionary and speculative demands. Keynes's musings on the interplay between firms who wish to borrow to finance investment, and banks that provide that finance, is prescient of, and of course partly inspired, the Circuitist School's later contribution. But Keynes's less formal logic also reached some conclusions contrary to current Circuitist belief. Keynes was correct on these points, while recent Circuitist literature is in error. Notwithstanding this however, the contributions of Graziani et alia on the nature of a monetary economy are essential to the development of a proper model of Keynes's "revolving fund of liquid finance" (Keynes 1937c: 666). THE REVOLVING FUND Keynes identifies three sources of confusion between himself and Ohlin, Hicks and Robertson (Keynes 1937b: 241-246); the third of these-a confusion between the money needed to initiate an investment, and the money needed while investment is actually proceeding-led to the development of the concept of a finance demand for money: I proceed to the third possible source of confusion, due to the fact (which may deserve more emphasis than I have given it previously) that an investment decision (Prof. Ohlin's investment ex-ante) may sometimes involve a temporary demand for money before it is carried out, quite distinct from the demand for active balances which will arise as a result of the investment activity whilst it is going on. (Keynes 1937b: 246) Keynes emphasizes that, if a planned investment is to be turned into an actual one, then the investor will have a need for money that precedes the investment itself: Planned investment-i.e. investment ex-ante-may have to secure its "financial provision" before the investment takes place; that is to say, before the corresponding saving has taken place… There has, therefore, to be a technique to bridge this gap between the time when the decision to invest is taken and the time when the correlative investment and saving actually occur. (Keynes 1937b: 246) This finance could be secured either by new equity or new bank debt. In either case, there will be an imbalance between the market's commitments to finance these ventures, and actual savings at that point in time, which generates a "finance demand for money". Keynes argues that this should be considered a fourth, additional motive for desiring money in addition to the ...

Bailing out the Titanic with a Thimble

“…I have constructed such a model of a pure credit economy (Chapman and Keen 2005, Keen 2008, 2009, and use it here to illustrate the basic mechanisms of endogenous credit creation, and the impact of a 'credit crunch'. 12 The financial dynamics of this simple pure credit economy are shown in the table in Figure 13.…”