From London to Cambridge

The Department of Economics at the London School of Economics had its own journal, Economica, which was edited by the chair of the department, Lionel Robbins. Since Kalecki was attending research seminars there and, when not attending those seminars, was drafting his own papers, it was natural that he should direct one of his first papers in English to the editors of the journal for publication. His first English paper therefore appeared in Economica as Kalecki’s alternative explanation of Keynes’s ‘liquidity trap’, or the failure of business to respond to a loosening of monetary conditions by borrowing more for investment. Monetary policy had been loosened in Great Britain with the departure from the gold standard in 1931, allowing the bank rate to be reduced from 3.9 per cent in 1931 to 2 per cent in 1933 (the equivalent rate in Poland had been reduced from 8.6% in 1929 to 5% by 1934). However, this had given little stimulus to business investment. In his General Theory Keynes had attributed this apparent unwillingness to borrow for new investment to increased ‘liquidity preference’ due to more pessimistic expectations among businessmen. Kalecki suggested that the problem was rooted in the structure of corporate finance.