Entrepreneurship, knowledge and employment

Hicks’s theory of the short-term rate of interest and Thornton and Hawtrey’s influences

Lucy Brillant, University of Bourgogne-Franche-Comte

In Mr Keynes and the Classics (1937) the young John Richard Hicks set aside an analysis of money on which money is created to cancel debts, and in which banks play a crucial role; instead, he put the emphasis on the market for cash balance and the motives for the demand for money. Generally in the Thirties, Hicks was focusing on the determination of long-term rates of interest, especially in Value and Capital (1939) where he extended Keynes’s theory of the term structure of interest rates. My paper focuses on the “elder” Hicks who, between Critical Essays in Monetary Theory (1967) and his last book A Market Theory of Money (1989) analysed the formation of short-term rates of interest. One original aspect of our paper could be to link Hicks thought to Thornton and Hawtrey on the theory of credit. Their conception of liquidity enable to understand that the short-term rates, which is the price of liquidity, cannot go below a certain level. Hicks owes a lot to Thornton and Hawtrey’s endogenous view of money. As an aside, a line of continuity can be traced from Value and Capital (1939) to A Market Theory of Money (1989) as regards Hicks’s theory of short-term rates of interest. The plan is the following. The second part of my paper analyses how a credit economy creates its own circulating medium. Credit enables merchants to trade between them. Goods circulate thanks to bills, which characterize indebtedness from one merchant to another. In the third part we focus on the nature of money according to Thornton, Hawtrey and Hicks, which enables actors to clear debts. Money and credit are two different notions. Hicks’s ‘two spheres of circulation’ (1989) enables to grasp this difference. The fourth part concerns the role of banks as a dealer of “options” (in Hawtrey’s language). The fifth part is an attempt to draw a lien of continuity in Hicks’s thought about the “floor” of short-term rates of interest from Value and Capital (1939) and A Market Theory of Money (1989)


Keywords: banks, bills, convertibility, discretionary policies, instability of credit, money, short-term rate of interest

Paper file