One of the major mistakes of some Keynesian interpreters and followers has been to underestimate the extent to which Keynes believed that monetary policy along side fiscal policy was and remains important. It is a necessary but not sufficient mechanism in the battle to escape from a slump and lower unemployment. One can think of it as a scissors effect, both blades monetary and fiscal are essential. It is clear from the texts in the Halley Stewart lectures of 1931 and also in vol.XIII ,XIV and XXIX of Keynes‘s collected works that Keynes intended that both monetary policy and fiscal policy were to be mutually supportive. Keynes never believed or argued that one could accomplish low unemployment and economic recovery by using only one of the strategies. Alvin Hansen in his work Monetary Theory and fiscal policy published in 1949 goes too far at a time when Keynes‘s collected writings were unavailable. Hansen argues (pp83 ff) that Keynes s approach is ‘‘the income approach not the ‘‘quantity of money approach‘‘ Hansen maintains that monetary policy was still important but secondary although still significant. He cites an article by G Findlay Shirras in the Economic Journal that argues that the quantity of money is a ‘‘very imperfect guide to the causes of the trade cycle.‘‘  Hansen goes on to explore the income approach  in terms which have become very familiar in standards macroeconomics in the Keynesian era. Y=I +C+G. In his original formulation in the Collected Works Keynes wrote about the differences in entrepreneurial behaviour with respect to earnings derived from the sale of consumer goods and earnings derived from profitable investment projects.

‘‘the cure of unemployment involves improving business profits. the improvement of business profits can come about only by an improvement in new investment relative to saving. An increase of investment relative to saving must also ,as an inevitable by product bring about a rise in prices, thus ameliorating the burdens arising out of monetary indebtedness. … what means (can) we adopt to increase the volume of investment, which …means in my terminology the expenditure of money, on the output of new capital goods of whatever kind.‘‘… the practical means by which investment can be increased ,is, or ought to be, the bankers‘ business , and pre-eminently the business of the central banker

 

Keynes then goes on to detail 3 methods of accomplishing this task. these are the restoration of confidence for both the lender and the borrower; second new construction programmes under the direct auspices of the government or other public authorities. the government can borrow cheaply and will not be deterred by overnice calculations as to the rate of return and third the reduction in the long term rate of interest…‘‘the main volume of investment always takes the forms of housing, of public utilities and transportation and the rate of interest plays …a predominant part.‘‘ As is always the case during a business cycle downturn brought about by the growth of pessimistic expectations and a consumption shock there is an excessive tendency to hoard idle balances of cash and to overly speculate on the future of bond and stock prices. This exacerbates the crisis and can lead to a severe shock when markets crash.