On Keynes's Criticism of the Loanable Funds Theory

By accepting the claims of the loanable funds theory, contemporary monetary theory distances itself from Keynes's view of the rate of interest as a monetary phenomenon, and overlooks the arguments Keynes used to respond to the criticism of supporters of the loanable funds theory such as Ohlin and Robertson. This paper argues that the explicit consideration of the finance motive and the role of banks in financing investment does not imply acceptance of the loanable funds theory, but instead facilitates the elaboration of an alternative to the loanable funds theory. Associated with this alternative theory of credit is an explanation of the monetary nature of the fluctuations in income and employment, which is different from and more persuasive than accounts based only on the liquidity preference theory.