Kalecki’s Monetary Theory before the Second World War

The starting point of Kalecki’s monetary theory is not the abstract properties or functions of money, or the suppliers of that money, whether bankers or the state, but the possession of money by capitalists or firms. This chapter examines Kalecki’s pre-war monetary analysis. In his business cycle theory he put forward for the first time his idea that, from the point of view of the economy as a whole, investment finances itself, because investment raises the circulation of already existing money held by businesses in the economy. Investment merely redistributes that money as profits among those businesses. Investment is limited by the liquidity that enterprises possess. External finance, in the form of bank borrowing, incurs financial risk and requires higher rates of interest as that borrowing rises.