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University of Nebraska-Lincoln College of Business Administration

On the Theory of a Monetary Economy

Author(s): John Maynard Keynes
Source: Nebraska Journal of Economics and Business, Vol. 2, No. 2 (Autumn, 1963), pp. 7-9
Published by: University of Nebraska-Lincoln College of Business Administration
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Accessed: 07/05/2014 13:17

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In myopinionthe main reasonwhythe Problemof Crisesis

unsolved, or at anyratewhythistheory is to be
is so unsatisfactory,
foundin thelack of whatmightbe termeda MonetaryTheoryof
The distinction whichis normally madebetweena BarterEcon-
omyand a MonetaryEconomydependsupon the employment of
moneyas a convenient meansof effecting exchanges-as an instru-
mentofgreatconvenience, but transitory and neutralin its effect.
It is regardedas a merelink betweenclothand wheat,or between
theday'slabourspenton buildingthecanoe and theday'slabour
spenton harvesting thecrop.It is notsupposedto affect theessen-
tial natureof the transitionfrombeing,in the mindsof those
makingit, one betweenreal things,or to modifythemotivesand
decisionsof thepartiesto it. Money,thatis to say,is employed, but
is treatedas beingin somesenseneutral.
That,however, is notthedistinction whichI havein mindwhen
I saythatwe lack a Monetary Theoryof Production. An Economy,
whichuses moneybut uses it merelyas a neutrallink between
transactions in real thingsand real assetsand does not allow it to
enterintomotives mightbe called-forwantofa better
or decisions,
name-a Real-ExchangeEconomy.The theorywhichI desiderate
woulddeal,in contradistinction to this,withan Economyin which
Moneyplays part of itsown and affectsmotivesand decisionsand
is,in short,one of theoperativefactors in thesituation, so thatthe
courseofeventscannotbe predicted, eitherin thelongperiodor in
theshort,withouta knowledge of thebehaviourofmoneybetween
thefirststateand thelast.And it is thiswhichwe oughtto mean
whenwespeakofa Monetary Economy.
Most treatiseson the Principlesof Economicsare concerned

♦Reprinted fromDer Stand und die flachsteZukunftde Konjunkturforschung,

Festschriftfür ArthurSpiethoff,Duncker & Humblot, Munich, 1933, pp. 123-125.
The Editorial Board of the Nebraska Journal of Economics and Business ex-
pressesits appreciation to the firmof Duncker & Humblot, West Berlin, for their
kind permissionto reprint the above article by John Maynard Keynes. The title
was supplied by the Editorial Board of the Nebraska Journal of Economics and
Business because the article as it appeared initially in the Festschriftwas without
a title.

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mainly,ifnotentirely, witha Real-Exchange Economy;and-which
is morepeculiar-thesamethingis also largelytrueofmosttreatises
on the Theoryof Money.In particular,Marshall'sPrinciplesof
Economicsis avowedlyconcernedwitha Real-Exchange Economy;
and so, I think,is byfarthegreatpartof thetreatises of Professor
Pigou-to namethoseEnglishworkson whichI have beenbrought
up and withwhichI am mostfamiliar.But thesamethingis also
trueof the dominantsystematic treatisesin otherlanguagesand
Marshallexpressly states(Principlespp. 61,62) thathe is dealing
withrelativeexchangevalues.The proposition thatthepricesof a
tonoflead and a tonoftinare £15and £90meansno moreto him
in thiscontextthanthatthevalue of a tonof tin in termsof lead
is sixtons(alongwitha numberofothersimilarpropositions). "We
maythroughout thisvolume/'he explains,"neglectpossiblechanges
in thegeneralpurchasing powerof money.Thus thepriceof any-
thing will be taken as representativeof itsexchangevaluerelatively
to thingsin general"(myitalics).He quotesCournotto theeffect
that"we getthesamesortof convenience fromassumingtheexist-
enceofa standardofuniform purchasing powerbywhichtomeasure
value,thatastronomers do by assumingthatthereis a 'meansun'
whichcrossesthe meridianat uniformintervals, so thatthe clock
can keep pace withit; whereastheactualsun crossesthemeridian
sometimes beforeand sometimes afternoonas shownbytheclock."
In short,thoughmoneyis presentand is made use of forconven-
ience,it maybe consideredto cancelout forthepurposesof most
of thegeneralconclusionsof thePrinciples.Or if we turnto the
writings of Prof.Pigou,theassumptions of a Real-Exchange Econ-
omyappearmostcharacteristically in his takingas his normalcase
thatin whichtheshapeof thesupplyscheduleof labourin terms
of real wagesis virtuallyindependent of changesin the value of
The divergence betweenthe Real-Exchange Economicsand my
desiredMonetary Economicsis,however, mostmarkedand perhaps
most importantwhenwe come to the discussionof the rate of
Interestand to therelationbetweenthevolumeof outputand the
Everyone would,of course,agreethatit is in a Monetary Econ-
omy, my senseof the term that we actually live. Prof. Pigou
knowsas well as anyonethatwagesare in factstickyin termsof
money.Marshallwas perfectly aware that the existenceof debts
givesa highdegreeof practicalimportance to changesin thevalue
of money.Nevertheless it is mybeliefthatthefar-reaching and in
somerespects fundamental differences
betweentheconclusions of a
Monetary Economyand thoseofthemoresimplified Real-Exchange
Economyhave been greatlyunderestimated by the exponentsof

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the traditionalEconomics;withthe resultthatthe machinery of
thought withwhichReal-Exchange Economicshas equipttheminds
ofpractitioners in theworldofaffairs, and also ofeconomists them-
selves,has led in practiceto manyerroneousconclusions and poli-
cies.The idea thatit is comparatively easyto adaptthehypothetical
conclusions of a Real Wage Economicsto thereal worldof Mone-
taryEconomicsis a mistake.It is extraordinarily difficultto make
theadaptation,and perhapsimpossiblewithouttheaid of a devel-
opedtheory ofMonetary Economics.
One of the chiefcausesof confusionlies in the factthat the
assumptions of the Real-ExchangeEconomyhave been tacit,and
you will searchtreatises on Real-Exchange Economicsin vain for
any expressstatement of the simplifications introduced or forthe
relationship of its hypothetical conclusionsto the factsof thereal
world.We arenottoldwhatconditions haveto be fulfilled ifmoney
is to be neutral.Nor is it easyto supplythegap. Now theconditions
requiredforthe"neutrality" of money,in thesensein whichthis
is assumedin- again to takethisbook as a leadingexample-Mar-
shall'sPrinciplesofEconomics,are,I suspect,precisely thesameas
thosewhichwill insurethatcrisesdo not occur.If thisis true,the
Real-Exchange Economics, on whichmostof us havebeen brought
up and withtheconclusions ofwhichourmindsare deeplyimpreg-
nated,thougha valuableabstraction in itselfand perfectly valid as
an intellectual conception, is a singularly bluntweaponfordealing
withthe problemof Boomsand Depressions.For it has assumed
awaytheverymatter underinvestigation.
Even if theabove is in somerespectsan overstatement, it con-
tains,I believe,the clue to our difficulties. This is not the same
thingas to say that the problemof Booms and Depressionsis a
purelymonetary problem.For thisstatement is generallymeantto
imply that a complete solution is to be found in bankingpolicy.I
am sayingthatBoomsand Depressions are phenomenapeculiarto
an Economyin which-in some significant sensewhichI am not
attempting to defineprecisely in thisplace-moneyis not neutral.
Accordingly I believethatthenexttaskis to workout in some
detaila MonetaryTheoryof Production, to supplement the Real-
ExchangeTheorieswhichwe alreadypossess.At anyratethatis the
taskon whichI am nowoccupying myself, in someconfidence that
I am notwasting mytime.


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