ABSTRACT

The theory of interest, one of the most debated issues in the history of economic thought, can be classified as the monetary theory of interest and the nonmonetary theory of interest. The nonmonetary theory of interest, developed by classical economists and their modern followers, suggests that interest rate is determined by real factors. According to this theory, interest rate is determined by saving reflecting the supply of capital and by investment reflecting the demand for capital. In Keynes’s analysis, however, the monetary nature of interest rate is explained by the liquidity preference theory. That the concept of interest is a monetary phenomenon and that it is therefore determined by the money market constitute the essence of this approach. According to Keynes, the major reason for the confusion about the theory of interest is the fact that the intrinsic characteristics of money under conditions of a developed money economy, unlike a real exchange economy, have not been understood properly. That money not only has the function of a medium of exchange, but it also has the function of a medium of accumulating value has a central role in the developed theory of interest. In this context, Keynes defines the rate of interest, which is determined by the preference for liquidity, not by a decision for saving, as the reward for parting with liquidity for a specified period.