The Role of Money in Keynes' Treatise Credit Market Model

Abstract

Keynes' Treatise on Money was used to describe his ideas on the credit market. This was the market where equilibrium determines the rate of interest. The supply of credit, or loanable funds, was set equal to the demand for credit; variations in the interest rate were explained by shifts in these functions. Most of Keynes' early interest theories were short run; they were developed in relation to his theory of the credit cycle; he was attempting to explain why the interest rate would vary during a “slump” or an “expansion” of the economy. Some of Keynes' interest theory was also developed in relation to his attempt to rationalize Gibson's Paradox (GP), that prices and interest rates move in the same direction over time. This was Keynes' long run theory of interest.