The analytical preconditions for Keynes' theory of money

Evaluating Keynes' belief that the "general theory" would create a revolution in economics, depends, in part, on what defines the key elements of the general theory. This paper presents the analytical preconditions for one of these key elements, his liquidity preference theory of money. It is argued here that Keynes's liquidity preference theory of money was both a result of his own intellectual development and a theoretical necessity, given the rest of the theoretical structure of the general theory. Specifically, this paper argues that there were two analytical preconditions for the theory of money contained in the general theory. The first was Keynes' rejection of the quantity theory of money as the basis for conducting monetary policy, a theory he inherited from his English predecessors and he himself had embraced and to which he contributed earlier in his professional career. The second was his rejection of the neoclassical loanable funds theory of interest rate determination. A previous version of this paper was presented at the Forty-Sixth International Atlantic Economic Conference, Boston, MA, October 8–11, 1998.