ABSTRACT
Given the universal drive to achieve and maintain full employment, the ‘quantity theory of money’ may well come of age even as Keynes intimated, though not necessarily in the way envisaged by the conventional quantity theorists and practitioners. This calls for a new look at Keynes’ digressive yet suggestive chapter on ‘The Theory of Prices’ in the General Theory (Ch. 21). The present chapter1 might be regarded as an implementation of Keynesian monetary thinking in the light of post-Keynesian discussions, and in the perspective of post-war inflationary tendencies. This chapter is broadly designed to throw additional light on
monetary theory as a tool of economic analysis and on monetary policy as an instrument of price stabilization. To be more specific, it will discuss the cause-and-effect relation between liquidity and inflation by critical reference to the monetary doctrines of Alfred Marshall, A. C. Pigou, J. M. Keynes, and A. H. Hansen. Given the prevailing state of technology and the existing degree of
competition or monopoly (affecting the so-called ‘cost-push inflation’), cyclical inflation arises largely from the demand side of an economy, and is as recurrent as the business cycle itself. Whether monetary expansion, due to budgetary deficits or liberal bank credits, will or will not affect cyclical inflation depends on the nature and behavior of the community’s ‘liquidity-preference’ affecting effective demand in some fashion. There are three different concepts and hypotheses of liquidity2 due to Marshall, Keynes, and Pigou. Let us critically examine these approaches.
