[Provisional]
ESHET CONFERENCE 27 Feb., 2004 (Venezia & Treviso)
Keynes as a Theorist and as a Commentator
during 1924-1930
--- From A Tract on Monetary Reform to A Treatise on Money
Toshiaki Hirai
Faculty of Economics,
Sophia University,
Tokyo, JAPAN
e-mail: hirai-t@sophia.ac.jp
Many studies have been made of Keynes's theoretical development from A Treatise on Money (hereafter the Treatise) to the General Theory, for it is crucial to understanding how and when the Keynesian Revolution took place. In contrast, there have been very few serious studies, apart from those from historical and policy points of view, of Keynes's theoretical development from A Tract on Monetary Reform (hereafter the Tract) to the Treatise. As such, the purpose of the present paper is to clarify this development based on Keynes's books, manuscripts, letters, and other additional sources.
The paper runs as follows. Sections 1 and 2 are preliminary for Sections 3 and 4, the main part of this paper. In Section 1 the theory and policy of the Tract ,focusing on 'the fundamental equation' and 'the purchasing power of money',while in Section 2 the theory and policy in both the closed and open systems of the Treatise, focusing on 'the fundamental equations', are outlined. These are indispensable for grasping and interpreting Keynes's activities in the 1920s and various tables of contents, which are examined in Sections 3 and 4.
In Section 3 the appearance of the Treatise world is explained. Here we clarify that soon after the publication of the Tract, Keynes as an economic commentator changes, which anticipates the world to be developed in the Treatise. In Section 4, the developmental process through which Keynes, after the Tract, reached the Treatise is examined, primarily based on various tables of contents. Here we would clarify where the turning point can be detected in this process.Through Sections 3 and 4 it is argued that Keynes had two 'faces'; a theorist and a commentator.
1. A Tract on Monetary Reform
A. The Theory and Policy
The Tract, which was published in December 1923, begins by arguing that changes in the value of money (changes in its purchasing power) do harm to society. Keynes maintains that inflation redistributes wealth in such a way as is very injurious to the investing class, albeit very beneficial to the business and wage-earning classes, with the result that 'inflation has not only diminished the capacity of the investing class to save but has destroyed the atmosphere of confidence which is a condition of the willingness to save' (TMR, p. 29). At the same time, deflation leads to impoverishment of both the wage-earning and the business classes, by causing the latter to restrict production. It is therefore disastrous in its effects on employment. Keynes next goes on to deal with the problem of changes in the value of money induced by public finance through the printing of paper money in critical periods. Government, by force of necessity, often prints money in order to raise funds. Keynes points out that this is a method of taxation by which the government can procure real resources through inflation. He warns, however, that the method runs the risk of destroying the money system by changing the public's habits in the use of money.
Keynes suggests that this method is sometimes adopted in order to reduce the burden of the pre-existing liabilities of government. In such cases, however, he argues, a capital levy is a superior way of attaining the same objective, for it is both more expedient and more just.
B. The fundamental equation
Keynes then puts forward the theory of the domestic value of money (or the price index), advocating a monetary policy to attain a stable price level on this basis. His theory is founded on the quantity theory of Marshall and Pigou1, rather than that of Fisher, and is represented by the 'fundamental equation'
n = p (k + rk')
where n is currency notes or other forms of cash in circulation with the public, p the price of each consumption unit (the price index), k consumption units equivalent to the volume which the public would like to keep in cash, k' consumption units equivalent to the public's bank deposits, and r the proportion of their liabilities, k', that the banks keep in cash (the ratio of cash reserves to liabilities).
On the basis of this equation, Keynes proceeds to argue as follows. It is the duty of the monetary authority to keep the price level stable by manipulating policy variables. Both n and r are under the direct control of the monetary authority, whilst the amounts of k and k' depend partly on the wealth of the community, partly on its habits which 'are fixed by its estimation of the extra convenience of having more cash in hand as compared with the advantages to be got from spending the cash or investing it' (TMR, p. 64).
The stability of price p can be attained by either of two methods: (i) by stabilizing k and k' directly; or (ii) by manipulating n and r in such a way as they cancel the fluctuations of k and k'.
In case (i), Keynes thinks that the Bank Rate has an influence on k' and k to a certain degree. However, he argues that 'it is doubtful whether bank rate by itself is always a powerful enough instrument' (TMR, p. 69). This contrasts sharply with his later theory and policy recommendations, where he stresses the importance of the Bank Rate (the rate of interest). Keynes comes to the conclusion that the duties of the monetary authority are 'to make sure that [it has] n and r thoroughly under control', and to establish the stability of p by manipulating n and r.2
In this regard it should be noted that Keynes stresses the importance of the persuasive power of the monetary authority:
It is one of the objects of this book to urge that the best way to cure this mortal disease of individualism [a tendency of the level of expectation to increase or decrease cumulatively] is to provide that there shall never exist any confident expectaiton either that prices generally are going to fall or that they are going to rise; and also that there shall be no serious risk that a movement, if it does occur, will be a big one (TMR, p. 34).
Keynes criticises the quantity theory in which a change in n is assumed to influence p only, without influencing k, r, and k'. In the long run this is probably true, but, as he put it, 'in the long run we are all dead' (TMR, p. 65). What really matters, according to Keynes, is that actual experience is in the short run. The quantity theory of money should be understood in a form which accepts that a change in n also influences k, r, and k'. He speaks of an increase or decrease in n as an inflation or deflation of cash; of a decrease or increase in r as an inflation or deflation of credit; of a diminution or an increase of real balances (k and k') as a deflation or inflation of real balances, respectively.
Keynes also stresses the importance of expectations about the price of the commodity entertained by the producers concerned, and refers to the psychological equilibrium of capitalism:
The merchant or manufacturer, who is calculating whether a 7 per cent bank rate is so onerous as to compel him to curtail his operations, is very much influenced by his anticipations about the prospective price of the commodity in which he is interested (TMR, p. 19).
No man of spirit will consent to remain poor if he believes his betters to have gained their goods by lucky gambling. To convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The economic doctrine of normal profits, vaguely apprehended by everyone, is a necessary condition for the justification of capitalism (TMR, p. 24).
The fact that the expectation of changes, as such, in the general price level [as distinct from changes in relative prices] affects the process of production, is deeply rooted in the peculiarities of the existing economic organisation of society (TMR, p. 30).
...the intensity of production is largely governed in existing conditions by the anticipated real profit of the entrepreneur (TMR, p. 32).
C. The Theory of Purchasing Power Parity
Having put forward the fundamental equation for the internal price level, Keynes proceeds to the theory of foreign exchange. Here he adopts the so-called 'theory of purchasing power parity', pioneered by Ricardo and made familiar by Cassel3:
(1)...the currency's internal purchasing power depends on the currency policy of the Government and the currency habits of the people, in accordance with the Quantity Theory of Money just discussed. (2)...the currency's external purchasing power must be the rate of exchange between the home-currency and the foreign-currency, multiplied by the foreign-currency's purchasing power in its own country. (3) In conditions of equilibrium the internal and external purchasing powers of a currency must be the same...(4) It follows, therefore, from (1), (2), and (3) that the rate of exchange between the home-currency and the foreign currency must tend in equilibrium to be the ratio between the purchasing powers of the home-currency at home and of the foreign-currency in the foreign country. This ratio between the respective home purchasing powers of the two currencies is designated ''purchasing power parity" (TMR, p. 71).
...the essence of the purchasing power parity theory, considered as an explanation of the exchanges, is to be found, I think, in its regarding internal purchasing power as being in the long run a more trustworthy indicator of a currencey's value than the market rates of exchange, because internal purchasing power quickly reflects the monetary policy of the country, which is the final determinant (TMR, p. 71).
According to this theory, the exchange rate with a certain foreign currency can be improved in favour of a country which, through an appropriate financial policy, succeeds in lowering its internal price level relative to the internal price level of the foreign country. The theory also shows why budgetary deficits which promote a progressive inflation destabilise the exchange rate.
With regard to policy, on the basis of this argument, Keynes draws the following conclusions:
(i) He objects to a policy of deflation, defined as 'reducing the ratio between the volume of a country's currency and its requirements of purchasing power in the form of money, so as to increase the exchange value of the currency in terms of gold or of commodities' (TMR, p. 117), because it is neither desirable nor possible. Instead he supports a policy of devaluation, defined as 'stabilising the value of the currency somewhere near its present value, without regard to its pre-war value' (TMR, p. 117);
(ii) In the case where the stability of the domestic price level is incompatible with that of the foreign price level, the former should have priority over the latter. If a foreign price level that is beyond control is unstable, the government cannot stabilise the domestic price level and the foreign exchange market simultaneously. Moreover, the stability of foreign exchange is of only secondary importance, whilst maintaining the stability of the domestic price level is very important, in order to avoid the above mentioned social evils;
(iii) He is opposed to the restoration of the Gold Standard, on the grounds that it would threaten the stability of the internal price level and only bring about the stability of the foreign exchange if all other countries were also to accept the Gold Standard. He also doubts 'the wisdom of attempting a ''managed" gold standard jointly with the United States, on the lines recommended by Hawtrey [as expressed in Monetary Reconstruction]' (TMR, p. 140), for even if the Gold Standard were to be restored, the fact remains that the United States, which had accumulated an enormous amount of gold in consequence of World War I, had already managed the value of gold per se by adopting a gold sterilisation policy (that is, 'Gold itself has become a "managed" currency' (TMR, p. 134)).
The Tract ends by discussing the method for regulating the supply of currency and credit in order to maintain the stability of the internal price level, and that for regulating the supply of foreign exchange in order to avoid temporary fluctuations between the internal and the external price levels. Keynes's main suggestion is that the United States as well as Great Britain should aim at 'the stability of the commodity value of the dollar rather than at stability of the gold value of the dollar' (TMR, p. 158) and stabilise the former value, if necessary, by changing the latter one.
D. An Evaluation --- the Fundamental Equation
Here we shall evaluate the Tract, confining our attention to the fundamental equation, n = p (k + r k').
(1) Keynes thinks that a change in n does not bring about a proportionate change in p in the short run, although it does do so in the long run, on the grounds that the change in n induces simultaneous changes in k, k' and r. The fundamental equation mainly deals with how the price level (p) changes in relation to changes in the real balances (k and k') and the banks' ratio of cash reserves to liabilities (r).
In a sense, Keynes's theory is a variant of Fisher's theory of money, as developed in Fisher (1911). On the one hand, Fisher put forward the equation of exchange, MV+M'V'= PT, where M denotes the quantity of money, V its velocity of circulation, M' bank deposits, V' their velocity of circulation. The equation shows that if M and M' are, say, doubled (M' is supposed to hold a definite relation to M), then P is doubled provided that V, V' and T remain unchanged. Fisher thought that the equation holds good in the long run.
On the other hand, Fisher put forward the theory of 'transition periods'4(his theory of credit cycle) during which the relation between M and M' is not rigid. He stressed the point that the interest rate lags behind prices with the result that the entrepreneurs obtain profits. The argument runs as follows: supposing that the amount of money increases, prices rise and the rate of interest rises but not sufficiently to keep pace, with the result that profits increase. Consequently, entrepreneurs expand their loans, and, to a degree, increase the amount of `trade' (output). Deposit currency expands relative to money, and prices continue to rise, causing the same series of changes. The expansion continues until the rate of interest keeps pace with prices, that is, until the banks 'are forced in self-defence to raise interest because they cannot stand so abnormal an expansion of loans relatively to reserves' (Fisher, 1911, p. 64). With the rise in the rate of interest, some entrepreneurs begin to fail, and the rate of interest is raised again and again until sufficiently many entrepreneurs become bankrupt. Prices finally begin to fall. The economy then proceeds along a series of changes which is the inverse of a series of changes in the case where prices are rising, until the rate of interest keeps pace with the prices.
(2) In contrast to Fisher, however, Keynes does not specify any mechanism which causes the real balances (k and k') to change. As we saw above, Keynes pays attention to the fact that 'the expectation of changes in the general price level affects the processes of production' (TMR, p. 30). However, it is not made clear how this relates to the real balances.
(3) The rate of interest, which plays an essential part in Fisher's theory of transition periods, plays little or no part in the Tract's account. Keynes only refers to the rate of interest to the extent that it affects k' to a degree.
(4) An item in the right-hand side of the fundamental equation, k + rk', expresses the demand for high-powered money (in terms of consumption units). This corresponds to ky in Marshall's equation of exchange, M = kpy (where M denotes the amount of money, k the Marshallian k, p the price level, and y income). Keynes's equation does not follow Marshall's, however, in that in the latter the public want to hold a certain proportion of their income in the form of money.
(5) Dividing the demand for high-powered money into k and k' is somewhat pointless, because Keynes does not clarify how or why the public chooses to divide its money between cash and bank deposits.
2. A Treatise on Money
A. A Closed System
In the Treatise Keynes places the financial problem at the centre of the theoretical system. According to this line of thought, by manipulating the rate of interest, the banking system can move the price level of investment goods (and therefore the value of investment) in one direction whilst moving savings in the other. When this is done, Keynes argues, (excess) profit, which is the difference between the value of investment and saving, disappears, and the stability of both the price levels and the level of output is achieved:
The banking system has no direct control over the prices of individual commodities or over the rates of money earnings of the factors of production. Nor has it, in reality, any direct control over the quantity of money; for it is characteristic of modern systems that the central bank is ready to buy for money at a stipulated rate of discount any quantity of securities of certain approved types.
Thus...it is broadly true to say that the governor of the whole system is the rate of discount. For this is the only factor which is directly subject to the will and fiat of the central authority, so that it is from this that induced changes in all other factors must flow.
This means, in substance, that the control of prices is exercised in the contemporary world through the control of the rate of investment. There is nothing that the central authority can do, whether it operates by means of the bank rate or by means of open-market dealings, except to influence the rate of investment. But our fundamental equation has shown that, if the rate of investment can be influenced at will, then this can be brought in as a balancing factor to affect in any required degree, first of all the price level of output as a whole, and, finally, as a response to the effect of prices on profits, the rate of money earnings of the factors of production (TM.2, p. 189).
We examined the theoretical structure and the 'fundamental equations' in detail elsewhere. To sum up, we understand that the Treatise has two types of theory --- a Wicksellian theory and a theory peculiar to Keynes. The latter is expressed as a dynamic process composed of the mechanism determining the price level of consumption goods, the mechanism determining the price level of investment good, and the mechanism representing the behavior of the entrepreneurs (which we call the TM supply function). We understand, moreover, that we should not overestimate the importance of the fundamental equations, especially the second fundamental equation (See Hirai, 1997-9, Chapter 7).
For now we will just confirm that Keynes stresses that manipulation of the rate of interest by the banking system is sufficiently effective in bringing about equilibrium in the economy.
B. An Open System
For an open system, the 'fundamental equations' are extended as follows5:
P = E/O + (I1' - S1)/R (1)
Π= E/O + (I1 - S1)/O (2)
where Π is the price level of output as a whole, P the price level of consumption goods, E money earnings, O the total output, I1 the value of home investment, S1 the volume of home saving, I1' the adjusted cost of home investment, and R the volume of consumption goods.
The conditions of internal equilibrium are defined as follows:
I1' (= S1) = I1 (3)
I1 = S1 (4)
On the other hand, the condition of external equilibrium is defined as equilibrium of the balance of payments:
L = B (5)
where L is the value of foreign lending (the balance of capital), B the value of the foreign balance (the current balance).
It follows that 'complete equilibrium requires both that I1 = S1 and I1 = I1', and that L = B' (TM.1, p. 147). Internal equilibrium and external equilibrium in this open system are considered to be attained simultaneously through the bank rate policy of the monetary authority6:
...the bank's recognised instrument for achieving the desired relationship between B and L is the instrument of bank rate --- just as it would be if I = S was its sole objective. For the instrument of bank rate has been found by experience to influence the movement of gold into and out of a country's reserves, a rise of bank rate increasing B - L and a fall diminishing it. Now changes of bank rate which are aimed at preserving equilibrium beween B and L may be expected to exercise a disturbing effect in the first instance on the equilibrium between I and S. But we shall see that ...there is always a level of bank rate which is compatible in the long run both with the equilibrium of B and L and also with that of I and S. ...
But the essence of the matter can be set out briefly. Raising the bank rate obviously has the effect of diminishing L, the net amount of lending to foreigners. But it has no direct influence in the direction of increasing B. On the other hand, just as the dearer money discourages foreign borrowers, so also it discourages borrowers for the purposes of home investment, with the result that the higher bank rate diminishes I1, the volume of home investment. Consequently total investment falls below current savings (assuming that there was previously equilibrium), so that prices and profits, and ultimately earnings, fall, which has the effect of increasing B, because it reduces the costs of production in terms of money relatively to the corresponding costs abroad. On both accounts, therefore, B and L are brought nearer together, until in the new position of equilibrium they are again equal (TM.1, pp. 191-192).
...B moves in the opposite direction to P and P in the opposite direction to B - L, whilst L moves in the opposite direction to bank rate, for every value of bank rate there is a value of P at which B = L; and since S moves in the same direction as bank rate and I moves in the opposite direction, there is always a value of bank rate for which I = S. Consequently there is always a pair of values of bank rate and of P at which both I = S and B = L (TM.1, p. 193).
Let us now turn to Keynes's ideas on the world economy as a whole.7 Here again, the fundamental equations play an important role in the argument. Thus the short-period price level depends on the difference between the value of investment and the volume of saving in the world as a whole. On the other hand, the long-period price level in the Gold Standard depends on whether the amount of gold which is available for reserves is increasing faster or slower than the volume of trade.
Therefore, according to Keynes, in order to stabilise the short-period price level, the central banks of the world need to cooperate with one another to cope with fluctuations in the value of investment and the volume of saving. But in practice, under circumstances of severe competition between the central banks, it is unrealistic to expect cooperative action. Also, if the Gold Standard is strictly observed, it is impossible to control the long-period price level.8 However, Keynes argues that in reality the reserve ratio of each central bank fluctuates violently, and that there is considerable likelihood that the credit which each central bank creates returns to that bank.
In conclusion, Keynes advocates that any prospective international currency should ideally be put under the control of a supranational organisation, while gold should be retained for symbolic purposes only. This idea is connected with his 'Clearing Union Plan'9(April 1943). This is clear from the following quotation from Chapter 1 of the Plan, which declares its objective:
We need a quantum of international currency, which is neither determined in an unpredictable and irrelevant manner as, for example, by the technical progress of the gold industry, nor subject to large variations depending on the gold reserve policies of individual countries; but is governed by the actual current requirements of world commerce, and is also capable of deliberate expansion and contraction to offset deflationary and inflationary tendencies in effective world demand (Harrod, 1951, pp. 526-527).
C. Contrasting Points in the Treatise and the Tract
We have seen that throughout the 1920s Keynes underlined the importance of the monetary question and tried to build a theoretical model from this point of view.
It is important to recognise at the same time, however, that his theoretical model underwent considerable transformation during this period. In the Tract prominence was given to the volume of cash and the manipulation of the ratio of cash reserves, developing the argument from the point of view of both the quantity theory and the theory of purchasing power parity. By contrast, in the Treatise great weight was put on the Bank Rate operations and it was suggested that through such operations, not only control of the rate of investment but also simultaneous attainment of internal and external equilibrium, were possible.
There are several contrasting points particularly worth making:
(1) The rate of interest
The most conspicuous difference between the two books lies in the position ascribed to the rate of interest. In the Tract, the rate of interest plays a rather marginal role in the theoretical system. It appears only as either a factor affecting k' to some degree, or as one of the factors determining the difference between the spot and forward exchange rates --- a measure of the preference for the money in one international financial centre rather than in another. In the Treatise, in contrast, the rate of interest plays a central role.
(2) The quantity theory
In the Tract the determination of the price level is discussed in relation to the fundamental equation, and the credit cycle is understood only as fluctuations of k and k'.10 The equation does not depart very far from the quantity theory of money and the quantity of money is treated as a policy or endogenous variable. In the Treatise, in contrast, the fundamental equations part company with the quantity theory, for the price levels are determined independently of the quantity of money, which is treated as an endogenous variable.
(3) Public finance
In the Tract public finance is discussed only in relation to the procurement of fiscal funds through inflation induced by printing money ('inflation of cash'). There is no argument concerning public investment, for Keynes believes in a balanced budget11 and dismisses the idea of a deficit budget, saying that it destabilises the foreign exchange rate. In the Treatise , in contrast, Keynes defends the view that a deficit budget may be necessary in periods of depression.
(4) Price level
In the Tract there is only one price level. In the Treatise, in contrast, there are two kinds of price level --- that of consumption goods and that of capital goods. The 'first fundamental equation' is concerned with the determination of the price level of consumption goods while the theory of the 'bearishness function' explains how the price level of capital goods is determined.
(5) Investment an savings
In the Tract the whole quantity of savings is assumed to be invested, while in the Treatise investment and savings are distinguished.
(6) Unemployment
In the Tract unemployment is dealt with only in relation to deflation, but how it relates to the fundamental equation is unclear. In the Treatise, in contrast, unemployment is dealt with more consistently within the theoretical framework.
(7) In the Tract the argument as to external relations is made on the basis of the theory of purchasing power parity, there being no argument concerning foreign investment. In the Treatise, in contrast, the theory of purchasing power parity is denied and foreign investment is invoked in connection with the 'external equilibrium'.
3. The Appearance of the Treatise World
A. The Year 1924 --- Precedence of Keynes as an Economic Commentator
The seven characteristics of the Tract which we pointed out just above rapidly disappear from Keynes's statement as an economic commentator, soon after its publication in 11 December 192312 (As will be explained in Section 4, Keyne's thinking as a theorist is another matter).
The article entitled 'Currency Policy and Unemployment' dated 11 August 1923 (The Nation and Athenaeum. JMK.19, Part I, pp. 113-118) clearly belongs to the world of Chapter 1 of the Tract, where he points to a lack of trust in the price level as the cause of unemployment.
In the conference, 'Unemployment in the Internal and International Aspect' of the League of Nations in March 1924 (JMK. 19, Part I, pp. 182-193), he develops the argument, depending on the analytical method of the Tract.
It is in the article entitled 'Free Trade' dated 24 November and 1 December 1923 (The Nation and Athenaeum. JMK. 19, Part I, pp. 147-156), in which he defends free trade, criticising Mr Baldwin's protectionism ('the claim to cure unemployment involves the protectionist fallacy in its grossest and crudest form', JMK.19, Part I, p. 152), that the change might be recognised for the first time. Then Keynes, as an economic commentator, turns to analysing the economy in terms of investment, saving, foreign investment, the rate of interest and unemployment.13
He went on analysing it in this way from that point of time. For example, in the article, 'Does Employment Need a Drastic Remedy?' (The Nation and Athenaeum, 24 May 1924. JMK.19, Part I, pp. 219-223), he insists that the government should use subsidies in order to divert savings from foreign investment to home investment, and that the government should spend the sinking fund on domestic capital construction. Similarly, in the article, 'A Drastic Remedy for Unemployment' (The Nation and Athenaeum, 7 July 1924. JMK.19, Part I, pp. 225-231), he argues that excessive foreign investment results in unemployment and the deterioration of the balance of payments, suggesting the following:
...the next developments of politico-economic evolution will emerge from new experiments directed towards determining the appropriate spheres of individual and of governmental action.14And proceeding to particulars, I suggest that the state encouragement of new capital undertakings, by employing the best technical advice to lay the foundations of great schemes, and by lending the credit and the gurantee of the Treasury to finance them more boldly than hitherto, is becoming an inevitable policy. There is no sphere where private initiative is so lacking...as in the conception and execution of very costly projects which may be expected to yield from 5 to 6 per cent (JMK.19, Part I, p. 229).
Keynes argues that a high rate of interest abroad causes a drain on domestic saving in the form of foreign investment, and that this causes insufficient domestic investment, which leads both to unemployment and disequilibrium of the balance of payments. We should note here that Keynes's above statement concerning domestic investment and government subsidies is presented as a second best policy. He believes that these policies are necessary because it is practically difficult to manipulate the domestic rate of interest under the prevailing circumstances.15
He repeated this kind of argument in the following papers.16
(i) 'Some Tests for Loans to Foreign and Colonial Governments' (The Nation and Athenaeum. 17 January 1925);
(ii) 'Our Monetary Policy' (The Financial News, 18 August 1925);
(iii) 'The Autumn Prospects for Sterling: Should the Embargo on Foreign Loans Be Reimposed?' (The Nation and Athenaeum, 23 October 1926);
(iv) 'British Balance of Trade: 1925 - 1927' (The Economic Journal, December 1927);
(v) 'How to Organise the Waves of Prosperity' (The Evening Standard, 31 July 1928);
(vi) 'The Industrial Crisis' (The Nation and Athenaeum, 10 May 1930).
Clearly this argument belongs --- not to the worldview of the Tract --- but to that of the Treatise. However, we should note that Keynes as a theorist had developed his theory based on the theoretical framework of the Tract until around 1929, which is the main theme in Section 4.
B. The Treatise's Analysis of the Real World
We can reinforce the point that the worldview of the Treatise originated in 1924, by examining the analyses of the British economy and the world economy17 it develops. For Keynes's theory and his analysis of the economic conditions around this period are all contained in the Treatise.
(a) The British Economy
Among the significant events that had occurred in the British economy, Keynes places special emphasis on the return to the Gold Standard at prewar parity in April 1925. He argues that equilibrium in the economy under this condition could only have been achieved through a reduction in the rate of money earnings per unit of output (E/O); that is, through income deflation. This reduction could have been brought about, not by a cut in money wages, but by an increase in efficiency; that is, by 'rationalisation'. What happened in fact, Keynes argues, was that, as the British Government adopted a tight monetary policy, profit deflation occurred, followed by a decrease in production and an increase in unemployment.
The return to the Gold Standard at prewar parity (which meant an appreciation of sterling) had two adverse effects upon the British economy.
First, it caused the balance of payments to worsen because it increased domestic costs of production relative to costs abroad in terms of gold.18 This kind of argument can be traced back to The Economic Consequences of Mr Churchill which was published in July 1925 (JMK.9 [Essays in Persuasion], pp. 207-230), and his lecture in The Manchester Guardian Commercial dated 15 October 1925 (JMK.19, Part I, pp. 442-447).
Second, it caused an increase in foreign lending because it increased the attractiveness of foreign lending compared with home investment. If the government were to try to maintain external equilibrium under these circumstances, there would be a good chance that the market rate of interest would rise above the natural rate of interest. As a result, Keynes argues, home investment would progressively drop and the economy would fall into the vicious circle of profit deflation and increasing unemployment.
Having analysed the British economy from 1925 to 1930 in this way (the analysis makes use of equations (1) and (2) above and the 'TM supply function' defined as the behavior of entrepreneurs such as, if they make a profit in the current period, they expand output in the next, and if they take a loss in the current period, they contract output in the next (See Hirai, 1997-9, Chapter 7), Keynes mentions four policies which could be adopted in the effort to overcome its difficulties.
(i) Rationalisation of industries
It would decrease the cost of production, thus improving the external balance. He thinks this would be the most attractive method, if it is possible to implement in practice.
(ii) A Rise in tariffs
It would decrease the volume of imports and improve the external balance.
(iii) A subsidised interest rate for home investment
It would both promote home investment and decrease investment abroad.
(iv) Easy money policies on an international scale
It would promote both home investment and investment abroad.
Overall, Keynes emphasises the second and third policies. Note that great emphasis is put on a subsidy to home investment. The position which public investment occupies in his armory of policy recommendations is rather low;19
It may be that the attainment of equilibrium in accordance with our traditional principles [the principles of laissez-faire] would be the best solution --- if we could get it. But if social and political forces stand in the way of our getting it, then it will be better to reach equilibrium by such a device as differential terms for home investment relatively to foreign investment, even, perhaps, such a falling off from grace as differential terms for home-produced goods relatively to foreign-produced goods, than to suffer indefinitely the business losses and unemployment which disequilibrium means (TM.2, p. 169).
(b) The World Economy
Keynes thinks that the most salient characteristic of the postwar economy as compared with the prewar economy lies in the high market rate of interest. For a time after the war, the natural rate of interest had been fairly high, owing to;
(i) the recovery of working capital which was necessary for the peace economy to function;
(ii) the reconstruction after war damage;
(iii) the rise of the motor industry.
However, he argues that this tendency had become steadily weaker after about 1925. At this point, two events occurred which contributed to a rise in the market rate of interest.20 One was the return to the Gold Standard. The other was the problem of reparations and war debt. The former caused the central banks involved to adopt a tight monetary policy, while the latter forced several governments into additional borrowing in order to repay their debts.
Moreover, in 1928 speculative borrowers for securities appeared. Thus the market rate of interest remained at a higher level than the natural rate of interest. As a result of this prices fell. Subsequently, a loss induced a decrease in production through the 'TM supply function', which in turn caused a further decrease in investment.
In such circumstances, Keynes argued, many difficulties would be imposed on the economy for a long period if the government remained simply a passive onlooker, so that it (especially the British and American governments) could, and should, lower its rate of interest:
...the rate of investment need not be beyond our control, if we are prepared to use our banking systems to effect a proper adjustment of the market rate of interest. It might be sufficient merely to produce a general belief in the long continuance of a very low rate of short-term interest. The change, once it has begun, will feed on itself (TM.2, p. 346).
C. The World of the Treatise and that of the General Theory
The above discussion has clarified that in 1924 Keynes as an economic commentator had already shifted to the worldview of the Treatise, which he maintained from then on. We can encapsulate this outlook as follows:
(1) The central theoretical structure: profit is determined by the difference between investment and saving, both of which are determined by the rate of interest. Profit, thus determined, causes the volume of output and the level of employment to fluctuate, through the TM supply function.
(2) The policy advice: monetary policy, through the manipulation of the rate of interest, is particularly recommended. However, in the present circumstances of the British economy, implementation of this is difficult to carry out. Therefore, subsidisation of home investment schemes and public investment are advocated as a second best alternative.21
With regard to policy, we should pay attention to the fact that there is no inconsistency between stressing monetary policy and advocating public investment. Both can be used to bring about an increase in investment without causing conflict.
In the two statements above, there exist two important lines of argument which are to be retained in the General Theory. First, the General Theory contains a theoretical structure in which investment, which is determined by the rate of interest, determines the volume of output and the level of employment. From a theoretical point of view it should be pointed out that it is not public but private investment (which depends on the rate of interest) which is essential to the theory which explains how the level of employment is determined. Second, as far as policy advice is concerned, in the General Theory monetary policy also comes first, followed by public investment policy (However, 'monetary policy' now means 'money supply policy'. This is a departure from the position of the Treatise). But this does not mean that Keynes considered the latter policy to be less effective than the former. In the General Theory, they are considered to be equally effective. In that sense, it is true that Keynes's emphasis shifts somewhat between the Treatise and the General Theory. This will become clear if we compare the article 'An Economic Analysis of Unemployment' with 'The Theory of Effective Demand' (June 1934. JMK.13, pp. 457-468). In the former article, Keynes stresses a reduction in the long-term rate of interest, followed by new construction programmes under the auspices of the government. In the latter, he emphasises an increase in public spending through deficit financing. Here he does not refer to the rate of interest, but this does not mean that he disregards it in this period.22
It is evident from the above discussion that the two statements used to delineate the world view of the Treatise can also be applied, if revised slightly, to that of the General Theory:
(1) The central theoretical structure: investment, which is determined by the rate of interest, determines the volume of output.
(2) The policy advice: on the basis of (1), monetary policy and public investment policy are advocated.
To sum up, during 1924-1936 Keynes essentially maintained both the similar theoretical structure and, based upon it, the similar viewpoint with regard to policy.
In order to avoid any possible misunderstanding, however, a word of caution on this may be necessary. The above argument does not claim that the relation between the theoretical frameworks of the Treatise and the General Theory ought to be seen as continuous. On the contrary, as far as pure economic theory is concerned, they are unquestionably discontinuous (For this, see Hirai, 1997-9, Chapter 16, Section 2). What we have tried to do here is to look at Keynes's activities in a wider perspective. We should also note that Keynes as a theorist went on thinking in terms of the theoretical framework of the Tract until the late 1920s, which is, again, the main theme of Section 4.
D. Appendix: Keynes's Advocacy of a Low Interest Rate Policy in the 1930s and the 1940s
We can easily document how Keynes persistently stressed monetary policy (a low interest rate policy) in the 1920s. The problem is not confined to the 1920s, but is extended to the 1930s and even the 1940s. It will be useful to show here how Keynes had been an advocate of a low interest rate policy over a long period.
(a) The 1930s
The documents concerned in the 1930s are Keynes's statements to the annual meetings of the National Mutual Life Assurance Society, of which he was president from 1934 to 1937 (JMK.21, pp. 312-404). Investigation of the development of Keynes's theoretical position in this period is hampered by the paucity of sources documenting the evolution of his theorising on interest rates. Moreover, the General Theory deals mainly with pure theory, and unlike the Treatise , the second volume of which is indeed entitiled 'the Applied Theory of Money', does not have an applied theory. Therefore, Keynes's statements from 1934 to 1937 are extremely valuable for understanding his policy views during this period.
Let us examine the annual statements in chronological order.
(i) February 1934
Here Keynes put greatest emphasis on the idea that the Bank of England has the ability to lower the long-term rate of interest, which in February 1934 was very high, standing at 3.5 per cent. He thought that this was far higher than would be compatible with full employment. At the time, the propensity to save was high, but there were few opportunities for investment. In order to establish full employment, a huge amount of saving needed to be directed toward investment, requiring a rate of interest of less than 3.5 per cent.
The resources of the banks depend at least as much on changes in the volume of securities purchased by the Bank of England as on changes in the Bank's stock of gold. Thus the technique of management lately evolved by the Bank puts it in its power to adjust the resources of the clearing banks to the needs of trade and employment. We are no longer at the mercy of the blind and perverse forces which ensured in pre-war days... (JMK.21, pp. 314-315).
In contrast to conditions under the Gold Standard of pre-war days, the Bank of England was equipped with the technique of open market operations by means of which it could control the long-term rate of interest, so that there was no need for it to allow the bond market to become bearish in the recovery phase of the trade cycle. Moreover, the Treasury was interested in lowering the rate of interest, so that its fall would be predictable.
There is no harm in the fall of the rate of interest being gradual, but it is a necessity for a steady movement in the downward direction. In each of the last three years [1932 to 1934], I have ventured ... to predict a falling rate of interest. I say today with undiminished conviction that we are still some way from the end of the journey [the liquidity trap], and that the course of events which I forecast three years ago will still continue in the same direction (JMK.21, pp. 314-315).
(ii) February 1935
In this statement Keynes stressed two things: (1) the necessity for a further fall in the long-term rate of interest; and (2) the importance of confidence in the expectation of a declining rate of interest in the future.
As to (1), Keynes was 'confirmed in the opinion that we shall require, for our economic health, a rate of interest gradually falling to levels much lower than we have known in the past, whereas the present reduced rates are even now no lower than those which often prevailed in pre-war days' (JMK.21, p. 349). He emphasises the need for, especially, a fall in the interest rate of fixed-interest securities outside the class of British Government securities, mortgage interest, and the rates charged by the banks. Moreover, in order for the fall in the rate of interest to have an effect on investment, it must continue for some time. The typical professional investor, however, expects the future rate of interest to rise.
Therefore, as to (2) he recommended that 'they [the Treasury] should themselves show confidence in the expectation of a declining rate of interest in the future' (JMK.21, p. 351).
In the years 1932-1935, the output of the British economy increased by 33 per cent. However, at the end of this period the unemployment rate still stood at around 11 per cent. Keynes believed that the only solution to the problem of persistent high unemployment would be to increase investment by adopting a low interest rate policy.
(iii) February 1936 (the month of the publication of the General Theory)
The main theme in 1936 was the same as the previous years: how to lower the long-term rate of interest:
If the present relatively...satisfactory position is to be protected from subsequent reaction, I am sure that a further reduction in the long-term rate of interest --- which, it must be remembered, will not produce its full effects for a considerable time --- is urgently called for (JMK.21, p. 375).
Keynes proposed two methods to reduce the long-term rate of interest. One was to foster confidence that the prevailing short-term rates will be maintained for some time (the short-term rates of interest were already very low). According to Keynes, the Treasury adopted a policy which decreased the rate on short-term bonds and increased the rate on long-term bonds. This policy does harm to the desired confidence. Keynes suggested that 'it is at least as important that the Treasury should themselves show confidence in the future of the short-term rate of interest as that they should maintain a low rate for the time being' (JMK.21, p. 376).
The other suggestion was to supply 'bank money fully adequate to satisfy the community's demand for liquidity' (JMK.21, p. 376). After comparing the economy of late 1935 with that of late 1932 on the basis of the theory of liquidity preference, Keynes remarks that 'it is evident that the time has come for another increase in the volume of bank money, if we wish long-term rates of interest to fall further' (JMK. 21, p. 377). This is in line with the statement from the General Theory: 'I know of no example of it [the liquidity trap]' (p. 207).
Keynes concluded that the recent policies of the Bank of England and of the Treasury were appropriate, but he observed that they had not achieved more 'mainly due...to their underestimating their own power to achieve what they recognise as desirable' (JMK.21, p. 377). He mentioned two factors which would stand in the way of lowering the rate of interest: free international movement of capital and full employment. However, he doubted that these limitations were yet operative (see JMK.21, p. 377).
(iv) February 1937
Again Keynes referred to lowering the rate of interest: 'it is a popular error to suppose that the rate of interest today is exceptionally low' (JMK.21, p. 403). At this period the condition of the British economy improved considerably, but it was expected to suffer from inflation on account of the rearmament programme. Under these circumstances, Keynes discussed the methods by which the Chancellor could increase the volume of money without causing inflation, and urged the necessity of lowering the rate of interest: '...I see no justification in the years to come for a long-term rate of interest higher than 3 per cent; and, indeed, it should be lower' (JMK.21, p. 404).
That Keynes believed at this period that the Bank of England and the Treasury had the ability to control the rate of interest can be documented from other sources. For example, there is the passage in his article, 'How to Avoid a Slump' (The Times, January 1937. JMK.21, pp. 384-395): 'it lies within their power, by the exercise of the moderation, the gradualness, and the discreet handling of the market of which they have shown themselves to be masters, to make the long-term rate of interest what they choose within reason' (JMK.21, p. 395).
(b) The 1940s
Keynes had been persistently concerned with interest rate policy even in his later years.23 This is clearly seen in:
(1) His article, 'Government Loan Policy and the Rate of Interest' (May 1939. JMK. 21, pp. 534-546);
(2) His letter to J. Wedgewood dated 7 July 1943, in which Keynes states that 'What I attach primary importance to is the scale of investment and am interested in the low interest rate as one of the elements furthering this' adding that 'But I should regard state intervention to encourage investment a probably a more important factor than low rates of interest taken in isolation' (JMK.27, p. 350);
(3) His notes submitted to the National Debt Inquiry24 in March 1945 (JMK.27, pp. 388-396. Especially pp. 390-391), in which Keynes argues the efficacy of the influences of interest rates on investment.
The economic situation of the 1940s differed markedly from that of the interwar period, and Keynes was mainly concerned with the inflationary phase as is found in his How to Pay for the War (1939). In this new situation which took place due to the War, Keynes put forward compulsory savings through deferred pay, which could prevent the economy from plunging into an inflationary spiral while improving social justice. Keynes even in the 1940s remained as an advocator of low interest rate policy, for he thought that one should increase investment while decreasing consumption. He believed that a low interest rate policy works effectively, though not decisively, in increasing investment. If the government failed to decrease consumption by deferred pay, then it might be forced to raise an interest rate for the prevention of inflation.
Through our examination of Keynes's statements, we have been able to confirm that he consistently maintained two things:
(i) In an economy where savings are excessive and there are too few opportunities for investment the prevailing long-term rate of interest is too high;
(ii) The Bank of England and the Treasury have the ability to control the long-term rate of interest.
From 1924 on, Keynes had persistently paid attention to the movement of the rate of interest. Before and in the Treatise, he was mainly concerned with the fact that the rates of interest abroad were too high. Under the circumstances in which the General Theory was written, he was mainly concerned with the fact that the domestic rate of interest was too high. That is one reason why Keynes ranked public investment as a secondary policy in the Treatise, while he ranked it as a primary one, together with monetary policy, in the General Theory. It is true that Keynes believed that monetary policy alone is not sufficient to enable the economy to attain full employment25 (see e.g. GT, p. 267). This does not mean, however, that he thought monetary policy has no effect on employment.
4. From the Tract to the Treatise
--- Conjectural Examination Based on Various Tables of Contents
In this section we examine Keynes's theoretical development from the publication of the Tract (1923) to the Treatise (1930), and where the turning point of this development can be found based on the materials contained in Chapter 2 of JMK.13, Chapter 1 of JMK.29, and Chapter 2 of JMK.20 (which deals with the Macmillan Committee, with the most relevant evidence being given by Keynes on February 20 and 21 in 1930), and Keynes Papers. Unfortunately, little evidence for the evolution of Keynes's economic thought in this period is extant, other than a large number of Tables of Contents (which will be abbreviated to TOC), a few manuscript fragments, and the evidence given in the Macmillan Committee.
A. The Conjectural Examination based on the Tables of Contents
The TOC (14 July 1924) entitled 'The Standard of Value' (pencil-written. JMK.13, pp. 15-16), is the earliest of the TOCs. Here we find terminology such as cash (m), the price level (p), the purchasing powers (k and k'), and the relation of credit to cash (r), as well as chapter titles such as 'The Relation of Purchasing Power to the Business Cycle' (Chapter 4). Because this TOC reminds us of the 'fundamental equation', Keynes seems to work in the theoretical framework of the Tract. In Chapter 3, 'The Influence of Bank Rate on Prices', he may state that bank rate does not influence prices on the basis of the theoretical structure of the Tract, in which the bank rate is considered to influence k' to some degree.
In the TOC (9 October 1924) entitled 'The Monetary Standard' (pencil-written. JMK.13, pp. 16-18), the title of Chapter 4, 'Prices Regarded as the Ratio of the Supply of Money Credit to the Supply of Real Credit' is worth noting. It seems to suggest that, in the terminology of the fundamental equation of the Tract, the supply of money credit may correspond to n, and the supply of real credit to k and k',so that the price level (p) as the ratio of the two may correspond to n/(k+rk')26 which then leads to the fundamental equation per se.We find similar chapter titles up to the TOC of 21 March 1925 (pencil-written. JMK.13, p. 27).
In a pencil-written manuscript entitled 'A Summary of the Author's Theory'27 (30 November 1924) --- a draft of Chapter 1 (JMK.13, pp.19-22) --- two sets of conclusions are drawn. One is an argument concerning the stability of the price level, which is similar to the one found in the Tract and seems to be closely related to Chapter 4 of the TOC (9 October 1924) described above.
I shall argue in this book, as I argued in that [the Tract], that the general price level can be stabilised by giving the Bank of England a control over the volume of bank money created, ..., and by using this control to cause the volume of bank money to vary in the same proportion as that in which the volume of real balances varies (JMK.13, p.21).
In the terminology of the Tract, the above indicates that the Bank of England can control the general price level (p) through manipulation of the volume of bank money (n) so as to conuterbalance a change in the volume of real balances (k and k').
The other set of conclusions is concerned with the trade cycle theory, in which the role played by circulating capital is stressed. Judging from the lack of mention of circulating capital in the TOC (9 October 1924), it seems the term was introduced for the first time in this manuscript. Moreover, the lack of reference to working capital indicates that this manuscript may have been written prior to both the TOC (30 November 1924), and the pencil-written manuscript for Chapter 4, 'Working Capital in Slumps and Booms' to be explained below.
The concept of working capital is explicitly argued in the above-mentioned pencil-written manuscript28, which is connected with Chapter 3, 'Fluctuations in the Demand for 'Working Capital' in relation to the Trade Cycle' of the TOC (30 November 1924) (JMK.13, p.18).
In situations where a slump has developed, according to Keynes, a recovery of business sentiment or the expenditure of public money raised by taxation is not sufficient to bring about a rapid increase in employment, although they are necessary.
it is only through the replenishment of working capital, by new savings becoming somehow available in liquid form, that the position can be restored (JMK.13, p.23).
Interestingly enough, Keynes believes that it is possible for fixed capital to become an obstacle to increasing employment by depriving working capital of much current saving. As such, he mentions an excess of fixed capital over current savings as one of the three factors that can interrupt a boom. Accordingly, he is against 'the expenditure, on the production of fixed capital, of public money which has been raised by borrowing' (JMK.13, p.23)29.
[it] can do nothing in itself to improve matters; and it may do actual harm if it diverts existing working capital away from the production of goods in a liquid form, which unlike fixed capital will be available for the further replenishment of working capital at a later date (JMK.13, p.23).
What is worth noting here is Keynes's stress on the importance of 'working capital' in the explanation of industrial fluctuations. Only this point shows a divergence from the Tract --- in the Treatise, as working capital is considered to accelerate the industrial fluctuations.
In the TOCs from 9 October 1924 to 13 June 1925 (pencil-written. JMK.13, pp.41-42), what is remarkable is the stress put on 'money credit' and 'real credit'. In the TOCs dated 21 March 1925 (JMK.13, pp.27-28) and 6 April 1925 (JMK.13, pp. 28-29), Keynes investigates the factors that determine the volume of money credit and that of real credit, and distinguishes 'price fluctuations initiated by changes on the side of money credit' (inflation or deflation) from 'price fluctuations initiated by changes on the side of real credit' (boom and slump). These correspond to, respectively, an inflation or deflation of cash --- an increase or decrease in n --- and an inflation or deflation of real balances --- a decrease or increase in k and k' --- in the Tract. Thereafter attention paid to money credit and real credit decreases, and they finally disappear after the TOCs dated 12 September 1926 (JMK.13, pp.46-47) and 22 September 1927 (JMK.13, pp.48-50).
The TOCs dated 14 July, 9 October, 30 November 1924, and 21 March 1925, 6 April 1925 clearly show that in this period Keynes continued to study money, paying particular attention to the concept of an ideal monetary standard (i.e. an ideal international monetary standard).30 This emphasis suggests that his motive for writing a book dealing with money was prompted by the then important controversy over the return to the Gold Standard of the United Kingdom.
Chapter 1 of the TOC entitled 'The Standard of Value' (14 July 1924) reminds us of the fundamental equation of the Tract, followed by an examination of managed and automatic currency systems, the automatic and the managed gold standard, the controlling authority's instruments, and its objectives. The final chapter is entitled 'The Transitional Period', which remind us of Fisher.
In the TOC entitled 'The Monetary Standard' (9 October 1924), 18 of 23 chapters deal with the ideal standard in some form or another, and we find an important point that relates to Chapter 38, 'Problems of Supernational Management', of the Treatise. That is, Keynes here points out, as the requirements of a standard, short-period adjustability to the fluctuations of real balances and of credit, and long-period stability of intrinsic value. Moreover, he mentions the composite commodity or tabular standard as alternative intrinsic value standards.
However, as he proceeded to the TOC (21 March 1925) entitled 'The Theory of Money with Reference to the Determination of the Principle of an Ideal Standard' (JMK.13, pp.27-28) and to the TOC (6 April 1925) entitled 'The Theory of Money with Reference to the Principles of an Ideal Standard' (JMK.13, pp. 28-29), Keynes seems to have increasingly concentrated on the theories of credit money, the credit cycle, and the trade cycle.
The change of the title from the TOC (9 October 1924), 'The Monetary Standard', to the title of the TOC (21 March 1925) suggests that Keynes's interest was moving from an ideal monetary standard to the theory of money. In the TOC (21 March 1925), only one of nineteen chapters deals with the monetary standard, while the rest focus on working capital, monery credit, real credit, and price fluctuations.
In fact, in the TOC (13 June 1925) to the TOC (31 August 1926) (pencil-written. JMK.13, pp. 41-46) the title was changed to 'The Theory of Money and Credit'.31 This change seems to be related to the United Kingdom having decided to adopt the Reconstructed Gold Standard. Keynes seems to have turned his attention to the theory of money rather than an ideal monetary standard.
To sum up, immediately after the publication of the Tract, Keynes began to think of a book on a monetary standard (an international monetary system), but around 1925 he turned his focus to a book on money and credit. In this sense, we can say that the true starting point of the Treatise did not occur until after this change.
The most effective method of theoretically distinguishing the Tract from the Treatise is to pay attention to how the 'fundamental equation(s)' are dealt with, for they are placed in a central position in both books.
The title 'The Fundamental Equation of Money' appeared for the first time in the TOC (6 April 1925) (JMK.13, pp. 28-29), is repeated in the TOC (13 June 1925) (JMK.13, pp.41-42), and appears again in the TOC (30 June 1925) (JMK. 13, p. 42). In the TOCs (27 April 1926, 26 May 1926, 6 August 1926) (JMK.13, pp. 43- 45), the title was changed to 'The Fundamental Equation of Price', and in the TOC (23 May 1927) (JMK.13, p. 47)32 it was changed to 'The Fundamental Equations of Price'. Any argument which was developed there might have come close to the 'fundamental equation' of the Tract, because, judging from the TOCs (26 May 1926, 6 August 1926, 31 August 1926 [JMK.13, pp. 45-46], and 23 May 1927 [pencil-written. JMK.13, p.47], Keynes seems to have tried to examine the elements that comprise the fundamental equation[s] in terms of the quantity theory of money. This link is verified by his mention of the velocity of circulation, the use of overdraft facilities, the proportion of investment deposits, the volume of transactions, the volume of total deposits, and the volume of total credits as elements of the fundamental equation(s), for example in the TOC (26 May 1926).
We may suggest that the 'fundamental equations' of the Treatise may well have appeared first33in the TOC (pencil-written.2 June 1927) entitled 'A Treatise on Money' (JMK.13, pp. 47-48), and again in the TOC (22 September 1927) (JMK.13, pp. 48-50), for there we find the expressions 'the first fundamental equation' and 'the second fundamental equation'. However, we cannot be certain as to what these expressions refer to. They may not look like the fundamental equations of the Treatise, for we cannot find chapters dealing with savings and investment. The argument still seems to be based on the velocity of circulation, overdraft facilities (which are found in the TOC concerned), and so on. We find in this TOC, moreover, expressions such as 'cash balances', 'real balances', and 'price level as the factor which brings the decisions of bankers and depositors into harmony', which seem to follow the idea expressed as Chapter 4, 'Prices Regarded as the Ratio of the Supply of Money Credit to the Supply of Real Credit', of the TOC (9 October 1924).
The TOC (6 October 1928) (pencil-written. JMK.13, pp.78-82) contains Chapter 11, 'Digression on Savings and Investment', in which such terms as savings, investment, earnings, and profits appear. As such, Keynes seems to be drawing near to the Treatise. However, in both this TOC and the TOC (typed. 2 August 1929. Here as Chapter 10)34(JMK.13, pp.113-117) he discusses investment and savings as 'Digression'. Moreover, in these TOCs 'the first fundamental equation' and 'the second fundamental equation' disappear and 'the fundamental equation' (or 'the fundamental equation for the purchasing power of money') is rather adopted. We are not certain whether this fundamental equation is similar to the first fundamental equation.
In passing, it is possible that the Wicksellian elements of the Treatise were incorporated around this period, though again we find no reference to Wicksell's theory in the surviving material. In this regard, the influences of Robertson are rather clear, for Keynes had ongoing discussions with Robertson regarding the latter's Banking Policy and the Price Level (1926) during making. Initially, as his letter to Robertson on 28 May 1925 shows, Keynes objected a distinction between hoarding and forced effective short lacking and the idea of the admitted power of inflation to bring unused resources into use. As is evident from his letter to Robertson (10 November 1925) (JMK.13, pp.40-41), however, as a result of Robertson's rewriting Keynes essentially agreed with Robertson's ideas.35
I think that your revised chapter V [The Kinds of Saving] is splendid, --- most new and important. I think it is substantially right and at last I have no material criticism. It is the kernel and real essence of the book (JMK.13, p.40)
In the Treatise, Keynes clearly remarks that he was greatly influenced by Robertson over a distinction between investment and saving. Interestingly enough, however, it was not until 2 years later after the publication of Banking Policy and the Price Level that the influences began to make their appearance. Moreover, as already noted, at first Keynes dealt with them as 'Digression', and his stance was more prudent than what would be expected.
Keynes's prudence is evident from his activities thereafter, as can be seen in Chapter 9, 'The Fundamental Equation' of Book 3, 'The Fundamental Equation of Money' of The TOC (2 August 1929) (JMK.13, pp.113-117. This is the last of the surviving TOCs, and is composed of 12 type-written pages and 32 chapters. It has pages in black ink up to Chapter 19, and no text survives except for Chapter 23. This manuscript was intended to be published in the form of one volume. It includes Chapter 9, Sections '(i) The Fundamental Equation for the Purchasing Power of Money', and '(ii) The Fundamental Equation in Terms of Monetary Factors'. The former is considered to indicate the first fundamental equation. However, the latter seems to refer to an argumet similar to that of Section (iv) 'The Relation of the Price Level to the Quantity of Money' of Chapter 10, 'The Fundamental Equations for the Value of Money' in the Treatise. Though we have no information regarding what the equation looked like, Keynes still seems to want to establish his fundamental equation in terms of the quantity of bank money, the proportion of savings-deposits, the velocity of circulation, and the activity of business (which are dealt with, respectively, in Chapters 12-15), so that it still seems to belong to the Tract. In the Treatise, these factors are reserved for consideration in Chapter 23, 'The Proportion of Savings Deposits to Cash Deposits', Chapter 24, 'The Velocity of Circulation', Chapter 25, 'The Proportion of Bank Money to Reserve Money', and Chapter 26, 'The Activity of Business'.
In his letter to Keynes (29 September 1929) (JMK.29, p.4), Kahn wrote that he had finished reading the galley and that the fundamental equations transformed themselves with 'big advantageous points. Keynes's lectures for the Michaelmas terms of 1929 were delivered along with this galley.
Due to the lack of sources, it is very difficult to trace the steps that Keynes took in the evolution of his fundamental equations to their final form. However, we can glean something from Robertson's letter to Keynes (5 Dec. 1929), for Keynes seems to refer to the role played by profits, an increase in investment, a rise in prices, and so forth, which indicates that Keynes has put forward something like the fundamental equations in the Treatise. Robertson writes;
...I still think I find a certain indeterminacy about the role of profits. They first appear as a result (bye-product) of the rise of P: then, though rather doubtfully, in connection with bank-rate, as a motive-force towards the excess of investment which raises P ....The whole claim for the superiority of your equation is that it brings out the causal sequence: yet, esp. in the bank-rate chapter, I feel that the sequence is not always clear (JMK.13, pp.118-119).
Taking this into consideration, we might say it is possible that the prototype of the fundamental equations of the Treatise came into being after the TOC (2 August 1929).
As the best material for determining Keynes's state of theoretical development during this period, we have his evidence in the Macmillan Committee (the Committee on Finance and Industry, the first meeting of which was held on 21 November 1929).What is particularly worth noting is Keynes's evidence on 20, 21, 28 February, and 6, 7 March 1930 (JMK.20, pp.38-157).
An argument concerning the fundamental equations (though these terms were not used in the Committee) is contained around p.74, from which we see that Keynes develops his argument generally along the lines of the fundamental equations in the Treatise, albeit with some differences.
I think it is easier...to take the case where investment is in excess of savings. That means that the incomes which are being paid out to producers, both those who are producing capital goods and those who are producing consumption goods, minus what they are saving, are greater than the cost of that part of their output which takes the form of consumption goods. You are increasing expenditure out of incomes faster than you are increasing the supply of consumption goods. For total income is governed by the cost of production of investment goods plus that of consumption goods. To get the expenditure on consumption goods, you take off from the total of incomes the amount which is being saved. If the amount you so take off is less than the amounts of investment, the sum which is left to the public to spend on consumption goods is greater than the cost of production of those goods; so that their prices go up to a figure in excess of what they have cost to produce (JMK.20, p.74).
Here, the price level of consumption goods are explained in terms of investment and savings. This explanation is slightly different from that in the Treatise, in which the first fundamental equation is formulated in terms of either the difference between the production cost of investment goods and savings,or the relation between the given volume of production of consumption goods and the expenditure on consumption goods. In the above quotation, the explanation is made in such a way to mix up the first and second fundamental equations.
Profits, as in the Treatise, are treated as windfall profits (see pp.74-75). The concept of the TM supply function, however, is not found.
When investment exceeds savings, the business world makes an amount of abnormal profit equal to the difference, and that abnormal profit finances the extra investment (JMK.20, p.73).
the way prices are forced downward is this. You put the Bank rate at a level at which savings are in excess of investments. Business men make losses, prices fall, and then at long last the business man forces down the remuneration of the factors of production and prices are then lower. But if you jam the machine halfway through so that you have a chronic condition in which business men make losses, you also have a chronic condition of unemployment, a chronic condition of waste; and the excess savings are spilled on the ground (JMK.20, p.75).
In this statement no argument regarding production can be found, which reflects that TM supply functions have not yet appeared in Keynes's thought in February and Mach 1930 (the 'chronic condition of unemployment', in passing, might be said to be the embryo of the concept 'under-employment equilibrium').
In fact, it is clear from Keynes's letter to Kahn (18 March 1930) (JMK.13, pp.125-126. As is explained later, he handed over the final galley of the Treatise to the printers by the end of September), that at this date the fundamental equations had yet to be established. This letter, at the same time, clearly states that Keynes consciously continued to try to connect investment and saving with the banking system.
...I am unable to arrive at any simple formula connecting the change in the value of investment with the amount of saving which goes on through the banking system. My belief is that in order to get a simple formula one has to take so many artificial assumptions that the formula ceases to be of any particular interest (JMK.13, p.125. Italics are mine).
Subsequently, Keynes, who was stimulated further by discussions with Pigou and Roberson, seems to have revised the chapter dealing with the fundamental equations. This revision is confirmed by his letter to Hawtrey (18 July 1930):
My attempt to explain to Pigou and Robertson the difference between excess hoarding and excess saving, about which they have been making obstinate misunderstandings, has led me to what seems to be a very great improvement of exposition and some slight change of substance. So I have been drastically re-writing the chapter which deals with the fundamental equations. This looks a great deal more different from the old version than it really is (JMK.13, p.135).
At this point we can find the influences from Robertson in Chapter 23,'The Part Played by the Banking System' (JMK.13, pp.83-113)in the TOC (2 August 1929).36 Two points can be made in this regard.
The first is concerned with the stability of prices. Influenced by Robertson's idea that 'The aim of monetary policy should surely be not to prevent all fluctuations in the general price-level, but to permit those which are necessary to the establishment of appropriate alterations in output and to repress those which tend to carry the alterations in output beyond the appropriate point' (Banking Policy and the Price Level, p. 39), Keynes came to think that the correct method of achieving price stability
must be sought...not in a policy designed to preserve the stability of prices without regard to the effect on the supply of credit for investment in working capital, but in the discovery of some means to meet the fluctuating demands for such credit without causing those reactions on the stability of the price level which have been usual in past experience (JMK.13, p.90).
The second point is concerned with forced saving --- in Robertson's terminology,automatic lacking.37 In Chapter 23, Keynes discusses the method of adjusting the supply of working capital by means of banking policy. In this connection he considers 'methods of adjusting the supply of working capital by means of banking policy'. One of the methods he refers to is the use of credit inflation. This method induces forced saving. Here Keynes acknowledges the value of allowing the economy to increase employment and output at the expense of price stability. This is in accord with Robertson's standpoint:
Our previous argument has demonstrated that, whilst it [credit inflation] destroys the equilibrium of the price level, it does, in doing this, really allow some additional investment to take place. ...a credit inflation may facilitate the transfer of purchasing power from 'unproductive' consumers to 'productive' consumers, which...is the necessary condition of increased employment and output (JMK.13, p. 104).
Chapter 23, however, is completely excluded from the Treatise, in which Keynes seems to place greater emphasis on price stability than on economic growth. This emphasis is closely related to the fact that after 2 August 1929 he came to be critical of the above-mentioned two points. In fact, as the Treatise drew nearer to completion, the divergence in theory between Keynes and Robertson widened.Trly critical of the thhis divergence can be seen, for instance, in 'Notes on the Definition of Saving' (JMK.13, pp.275-289) which was enclosed with Keynes's letter of 22 March 1932. In this note he is cleaeory of forced saving.39
...my critical departure from previous theories of 'forced' saving or of 'induced' and 'automatic' lacking lies not in my definitions...but in my conclusion...that induced and automatic lacking are not simple functions of monetary factors such as the quantity of money or its velocity of circulation... that they can arise in other ways than as a result (to quote D.H.R.) of 'additional daily stream of money being brought on to the market', and that, quantitatively, their amount cannot be deduced from banking statistics however complete (JMK.13, pp. 287-288).
Let us examine other elements that characterize the Treatise.
It is possible that the 'bearishness function' theory that plays a vitally important role in the Treatise first appears in Section (iv) 'Price Level as the Factor Which Brings Decisions of Bankers and Depositors into Harmony' of Chapter 5, 'Cash Balances and Real Balances', in the TOC (26 May 1926), although, once again, we cannot be certain.
Concerning bank rate, which is prominent in the Treatise, the title of Chapter 11, 'The Modus Operandi of Bank Rate' in the TOC (30 June 1925) is worth noting.
As for an investment price theory, we have a fragmentary note dated December 1929 (JMK.13, pp. 119-120). There Keynes mentions a theory to the effect that the price of new investment goods, P', is 'determined by degree of capital inflation which depends on rate of interest and bull-bear sentiment', while the 'price of old capital [P''] determined by rate of interest and by expectations of future prices'. (In our terminology, the former is 'Investment Price Theory (1)' while the latter is 'Investment Price Theory (2)'). He then refers to the observation that ' P' will be dragged up and down by P'' '.
In his letter to Alfred Harcourt (26 September 1928) Keynes wrote:
I should say that four-fifths of it is now completely finished. I am hopeful that I shall have finished it before Easter, and that it may be published in this country about May [1929]. ...It looks to me like exceeding 500 pages in the format which we are adopting in this country (JMK.13, p. 51).
Keynes planned to publish a one-volume book composed of 32 chapters on 1 October 1929 (The TOC (2 August) may correspond to its table of contents). However, the date of publication was postponed.
In the process of proofreading --- only the first galley for Chapter 30, 'Methods of Supernational Management I', and Chapter 31, 'Methods of Supernational Management II' , on which 16 July 1929 and 27 July 1929 are respectively stamped, survives ---, Keynes became dissatisfied with his book and finally wrote to Alfred Harcourt on 28 August:
The rewriting of my book on which I have had to embark turns out to be somewhat drastic, so that there is now no prospect of publication before January [1930]. I am, however, clear that the rewriting is worth while and will prove a great improvement.
One consequence of the re-arrangement which I am planning is that the book will probably fall conveniently into two parts of equal length, which I shall call ''The Pure Theory of Money" and ''The Applied Theory of Money". I am now planning, therefore, to divide the book into two volumes under the above titles...Each of the volumes under the new plan will probably be between 300 and 330 pages (JMK.13, pp. 117-118).
As such, in the summer of 1929,Keynes rewrote a great deal, changed the arrangement of the books, and decided to publish the work in two volumes. Around January of 1930, he spent a considerable amount of time on the Treatise, and in February he turned to the second volume. Around the end of May of 1930 he reached the final book of the Treatise.39
As the material which survives thereafter, we have only Chapter 21, 'Changes Due to International Disequilibrium',and Chapter 25,'The Proportion of Bank Money to Reserve Money' as the third galley of the Treatise in the final form, on which 4 March 1930 and 28 May 1930 are respectively stamped. From this we can see that since the summer of 1929 he rewrote the text a great deal, sent the pages to the printers, received the galleys, and went on revising the galleys, as a result of which he reached the third galley around the spring of 1930, and that it was not until before the beginning of the Michaelmas Terms (the date of publication was in October) that the final proofreading was finished and left the hands of Keynes.40
In the process of writing the Treatise Keynes had many discussions not only with Robertson and Hawtrey , but also with Pigou and Kahn. In particular, we should bear in mind that Hawtrey's criticism of the Treatise from his own theoretical standpoint was to have a great influence upon the development of Keynes's thinking on the way to the General Theory.41 It should also be noted that Keynes did make a great debate about the Treatise with Hayek as the author of Prices and Production (Hayek, 1931).42
B. The Results of the Examination
Let us sum up the points that have become clear from the above examination. The most interesting point is how Keynes reached the Treatise after the publication of the Tract (December 1923),and where the turning point can be detected in this process.
Though after the publication of the Tract Keynes was writing a book dealing with an international monetary system, around March 1925 he shifted his attention to credit money, credit cycle, trade cycle, and so on, and began to work out a book on money and credit that would be a starting point toward a new theory of money. This change in focus seems to have had something to do with the United Kingdom deciding to adopt the Reconstructed Gold Standard.
The most important focus in this respect should be put on the fundamental equation(s). Initially, the fundamental equation that Keynes developed was similar to that put forward in the Tract. This similarity can be confirmed, for example, in the TOC (26 May 1926), in which the velocity of circulation, the use of overdraft facilities, the proportion of investment deposits, the volume of transactions, the volume of total deposits, and the volume of total credits are pointed out as its elements and no chapter dealing with savings and investment can be found.
When did the fundamental equations of the Treatise appear? What is worth noting in this regard is Chapter 11,'Digression on Savings and Investment' in the TOC (6 October 1928),in which such terms as savings, investment, earnings, and profits appear, although they are not put in a central position in the theory. In the TOC (2 August 1929), although attention to investment and savings, and the emphasis on the maintenance of equilibrium between them is clearly recognizable, there is no hint that they are incorporated into the fundamental equations, for the fundamental equations still seem to be formulated in terms of bank money, the proportion of savings money, the velocity of circulation, and business activities.
From Robertson's letter to Keynes (5 December 1929),we feel that around this point in time an idea similar to the fundamental equations of the Treatise appear, for there the roles played by profits, an increase in investment, and a rise in prices are referred to.
Keynes's evidence from February-March 1929 in the Macmillan Committee is worth noting, for he developed an argument regarding the fundamental equations. The argument is similar to that in the Treatise, and yet it differs a slightly (We also cannot find something like a TM supply function).In fact, as is evident from his letter to Kahn (18 March 1930) (JMK.13, pp.125-126), which clearly shows that he tried to continue to connect investment and savings with the banking system, he did not seem to have reached the final version of the fundamental equations. We might say that it was not until the end of March 1930 that the fundamental equations of the Treatise appeared in their complete form.
We also paid attention to the influences of Robertson. Keynes was deeply involved in the making of Robertson's Banking Policy and the Price Level (1926), through which he began to make a distinction between investment and savings. It was not until three years later that Keynes began to incorporate these influences into his theory on money, when he treated them as 'Digression'. Keynes as an economic theoretician was very prudent. The influences of Robertson are evident in the TOC (2 August 1929) and its surviving manuscripts --- an argument regarding the stability of prices and that of the theory of forced saving. Thereafter, however, Keynes came to be critical of these arguments and finally abandoned them both. As the Treatise drew nearer to completion, the divergence between Keynes and Robertson widened.
5. Conclusion
The important points that have been clarified in this paper are as follows.
(i) The first is that Keynes consistently stressed the importance of monetary policy in controlling the economy. Even in the General Theory, he does not deny the importance of monetary policy. By examining the positions he took in the Tract and the Treatise, we showed that he consistently emphasized monetary policy, both from theoretical and policy points of view. When we see how Keynes tackled the monetary question in the 1920s, it will be natural to surmise that, as far as this problem is concerned, the transition towards the General Theory was smooth, though the theoretical structure underwent a great transformation.
(ii) The second point is that from 1924 to 1936, Keynes consistently advanced a theoretical position to the effect that the value of investment, determined by the rate of interest, determines the volume of output, and that in policy terms, he advocated both a monetary and a public investment policy on the basis of this theoretical position, though he prioritized monetary policy and continued to regard public investment policy as second best until immediately before the General Theory.
In this connection, we showed two things: (a) First, contrary to some widely held interpretations, Keynes as a commentator was advocating an adjustment of the economy through fiscal policy from as early as 1924; (b) Second, the ideas of the General Theory can justifiably be seen as extending, with regard to the second point, from those of the Treatise, although it is true that in the General Theory Keynes stresses fiscal policy, while he does not in the Treatise.
To avoid misunderstandings, however, our view of the above-mentioned consistency between the Treatise and the General Theory is discussed in a wider perspective, and does not contradict our view of a discontinuity between the two in a theoretical dimension.
(iii) The third point is the clarification of the theoretical and topical stance which Keynes had taken during 1924 - 1932. The main theme here is that in this period Keynes had two 'faces', that is, a theorist and a commentator. The period is divided in two.
One is the period 1924 - 1928, during which he, as a theorist, advocated the theory which belonged to the Tract while he, as a commentator, advocated policies based on the theory which was to lead to the Treatise. It will be made clear from an examination of the various tables of contents written since the publication of the Tract that Keynes as a theorist had entertained the world-view of the Tract. It was not until immediately before the publication of the Treatise that he changed his views and hit upon that of the Treatise, when the 'topical view' was incorporated as the main element of the 'theoretical view' into the Treatise, and the world-view of the Tract was abandoned. Thus, in 1929 the 'two faces' merged.
The other is the period 1929-1932,during which Keynes, as a theorist, adhered to the theory of the Treatise while, as a commentator, he advocated a public investment policy and the multiplier theory, both of which were to lead to the General Theory. Until the first half of 1932, Keynes continued to develop his theoretical system along the lines of the theoretical structure of the Treatise, so that he did not incorporate them into his theoretical system. However, in the second half of 1932, he radically changed his theory; that is, he abandoned the Treatise theory and adopted a new theory that was to lead to the General Theory. Moreover, he came to consider the problem which he had until then regarded as peculiar to the United Kingdom as one of pure theory. As such, he came to incorporate the multiplier theory into his theoretical system. Thus, around 1933 the 'two faces' again merged.
The divergence and convergence between theory and topics is crucial to understanding the developmental process of Keynes's theory.
Notes
*This paper is mainly based on Chapter 6 of my book, Looking at Keynes's Economics from Multiple Points of View (in Japanese), University of Tokyo Press, January 2003. Section 4 is still under construction, taking Keynes Papers (esp. Reels 27 and 28) into consideration.
1) See Marshall (1923, pp. 38-50), and Pigou (1917).
2) See TMR, p. 69. In the Treatise Keynes argues that the Cambridge formulation is not applicable to total deposits although it is applicable to 'income deposits'. The same criticism had already been made by Lavington (1921). On this, see Patinkin (1976), p. 42 and fn.8 on the same page.
3) Marshall developed the theory of purchasing power parity in the memorandum entitled 'Memorandum as to the Effects Which Differences between the Currencies of Different Nations have on International Trade' (1888). For this, see Keynes's 'Alfred Marshall' (Pigou ed., 1925), p. 193. For an examination of the conditions under which the theory of purchasing power parity is applicable, see TMR, pp. 73-80. For a rejection of this theory from the point of view of the terms of trade, see TM. 1, pp. 64-65 and p. 302.
4) This idea can be traced back to Hume. Cf. GT, p. 343.
5) Cf. TM.1, pp. 118-119, and 145-147.
6) In the Tract Keynes stresses that a simultaneous attainment of internal and external equilibrium is difficult. Here 'external equilibrium' means the stability of foreign exchange. At that time, a flexible exchange rate system prevailed. In the Treatise, on the other hand, external equilibrium is used as meaning that the balance of payments remains zero. In the Treatise he explicitly examines trade transactions and capital transactions, which is clearly found in the analysis of the disequilibrium process (TM.1, pp. 293-295).
7) The explanation below is based on TM.2, pp. 250-255.
8) There Keynes argues that in the long run the value of money should be managed in such a way that it adjusts itself to an 'international tabular standard'. See TM.2, pp. 349-354. Incidentally, the idea of a tabular standard was put forward by Marshall as early as 1885. Marshall proposed it in relation not to international trade but home trade and the short period. For this, see JMK.10, pp. 194-195.
9) The sources relating to the Clearing Union Plan are contained in JMK.25. Chapter 13, 'Bretton Woods' of Harrod (1951) describes the development of this plan in detail.
10) Behind this lies the idea that entrepreneurs determine the volume of output in the current period based on expected prices. Therefore, the stability of price (p) makes fluctuations of k and k' small.
11) Around this period Keynes advocated a balanced budget. See the note for the lecture at Manchester (JMK.19, Part I, pp.1-6). It should be noted that the budget here means the 'Chancellor's budget', which prior to the 1960s did not include all public expenditure (see P. Clarke (1997) in Maloney ed.) --- I owe this to Prof. G.C. Peden.
12) For this article, see GT, p. 334, at which certain phrases are quoted.
13) For the theoretical background to the investment-saving analysis, see TM. 2, p. 154, fn.1.
14) For Keynes's instructive and penetrating discussion of the relation between individuals and the state in a capitalist society, see Section 4 of The End of Laissez-Faire.
15) This is seen clearly in TM.2, p. 337, 'Keynes and Nationalism' (Hayasaka in Tachi ed., 1963), and Keynes's statement quoted in Moggridge (1976), pp. 83-84.
16) All the papers are reproduced in the following. (i): JMK.19, Part I, pp. 328-333; (ii) JMK.19, Part I, pp. 425-427; (iii) JMK.19, Part II, pp. 568-574; (iv) JMK.19, Part II, pp. 704-722; (v) JMK.19, Part II, pp. 761-766; (vi) JMK.20, pp. 345-349.
17) The explanation below is based on TM.2, pp. 162-169, and 338-347.
18) From this period to the General Theory, however, Keynes had consistently opposed a policy of cutting money wages to combat the economic difficulties, on the grounds that an increase in the power of Trade Unions makes wage cuts politically impossible, and that the difficulties can be overcome through wise management of a monetary policy.
19) In early drafts of Chapters 1 and 3 of the Table of Contents dated November 1924, Keynes argues that public investment through deficit financing cannot improve the situation. In the article 'Does Employment Need a Drastic Remedy?' (24 May 1924), Keynes recommends public investment. We can infer, therefore, that the former was written earlier than May.
20) In the article, 'An Economic Analysis of Unemployment' (June 1931), as compared with the Treatise, Keynes stresses that in this period, funds had been raised at high rates of interest and capital construction based on them had been flourishing. See JMK.13, p. 345.
21) It should be noted, however, that Keynes, in the manuscript written in November 1924, was still against public investment policy financed by borrowing.
22) For instance, in the article, 'Poverty in Plenty: Is the Economic System Self-Adjusting?' in The Listener, 21 November 1934 (JMK.13, pp. 485-492), he stresses the necessity of lowering the rate of interest.
23) The following two paragraphs was written in response to Prof. G.C. Peden's remark.
24) For this, see Moggridge (1992, pp. 714-717).
25) This shows an interesting contrast with Keynes's suspicion of the practicality of public investment policy in the 1920s (see JMK.13, p. 364). See Hirai (1997, Chapter 8, Section 1).
26) Money credit is estimated to mean the quantity of money (the nominal value), while real credit the public's demand for money in terms of consumption units.
27) This remains as seven sheets of papers. This is preceded and connected by Chapter 1, 'Introduction' of the TOC dated 30 November 1924, for, as will be explained later, here 'circulating capital' is stressed while 'working capital' does not appear as yet.
28) This remains as 4-5 fragmentary sheets of paper. The number of this title is written as not '3' but '4', so that it may not be the manuscript for Chapter 3 of the TOC dated 30 November 1924. Moggridge, the editor, estimates that it precedes Chapter 3.
29) This policy advice is in sharp contrast with that of the Treatise. It should be noted that a this point in time, Robertson than Keynes stressed the importance of fixed capital. See Robertson's comment (JMK.13, p.26) on Chapter 3 of Keynes's draft of November 1924 (JMK. 13, p. 26).
30) His studies on money was extended to ancient currencies. This was done during the period 1920-1926 and is contained as Chapter 2, 'Keynes and Ancient Currencies' of JMK.28.
31) In Keynes's letter to Macmillan dated 22 September 1926 (in Lord Keynes's Letters to Daniel Macmillan), he asks for publication of the book entitled The Theory of Money and Credit.
32) From August to April 1927 Robertson made a journey to Asia. Sanfilippo (forthcoming) conjectures that there might be connected with the fact that Keynes proceeded very little during this period.
33) Patinkin (1976, pp. 28-29) estimates that the fundamental equations in the Treatise may have appeared in the latter half of 1928.
34) We can confirm from the Keynes's Papers that all the table of contents above are pencil-written except for this one, which is typed.
35) See JMK.13, p. 34. For this see Sanfilippo (forthcoming, Section4).
36) The evaluation here is in full accord with Bridel (1987, p. 110).
37) On Keynes's stance on the theory of forced saving thereafter, see Hirai(1997-9, Chapter 7, Section 5(A(13)), Note 54), and Hirai (1997-9, Chapter 15, Section 1(B(a))).
38) Cf. Hirai (1997-9, Chapter 7, Note 54).
39) See JMK.29, pp.6-7.
40)See JMK.29, p.7.
41) This point was correctly studied by Davis (1980). See also Davis (1981) in O'Brien and Presley eds., and Hirai (1997-9, Chapter 8, Section 4).
42) See Hirai (1997-9, Chapter 7, Note 30).
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