INTRODUCTION

At one time, prior to the General Theory, Wicksell's monetary theory represented the most sophisticated attempt to complement the static formalism of the quantity theory. Wicksell's ideas, in particular the distinction between the natural and market rates of interest, were adopted by many economists, including both Keynes – in the Treatise - and Dennis Robertson (1934). Post-war developments in monetary theory have, however, all but obscured the Wicksell connection, to use Leijonhufvud's (1981) phrase. Despite a number of papers by Harrington (1971), Laidler (1972), Bailey (1976), Honohan (1981) and Kohn (1981b), and Leijonhufvud's best efforts, the significance of the Wicksell connection for post-war monetary theory remains obscure – buried as it is beneath Keynesian, neo-Walrasian and monetarist revolutions and counter-revolutions.

Nevertheless, as Leijonhufvud (1981: 131) correctly perceives, the theory of the real (or natural) rate of interest lies at the centre of some of the confusion and inconclusive quarrels in monetary theory. The theory of the natural or real rate of interest is crucial as it forms the hub around which all else rotates in Wicksellian monetary theory. From the Wicksellian perspective the debate between the loanable funds and liquidity preference theories is a case in point. Rejection of the loanable funds theory in favour of the liquidity preference theory entails abandoning the natural rate of interest.