Cambridge Journal of Economies 1991,15,301-313

im Kail<sM9
Marcello Messori*

Introduction
This paper refers to the most neglected part of Kalecki's framework: the monetary aspect.
One of the main points of Kalecki's theory is that the investment (and consumption) of
capitalists as a whole, carried out at a given date, are not a function of current savings.
Savings are determined by capitalists' current aggregate expenditure (cf. Kalecki, 1933C,
p. 13; 1935A, pp. 343-344; 1935B, pp. 29-30; 1939A, pp. 107-110; 1939B, pp. 46-47; see
also: Kregel, 1989, pp. 197-198). From-this, Kalecki infers that any increase in aggregate
investment will require provision offinancingonly if we take into account (i) the time-lag
between the increase in investment orders and the corresponding increase in investment
goods produced, and (ii) the increase in demand for money in circulation caused by the
increase in aggregate production, which in turn follows the increase in investment.
Kalecki defines these two elements as the 'technical' side of the money market. He affirms
that, neglecting (i) and (ii), any increase in investment will 'finance itself so that the
working of the economic system does not require any financing.
Kregel (1989) asserts that this view on investment and financing links the monetary
theories of Kalecki and Keynes. As Kregel himself emphasises (pp. 194-195, 198-200,
203), two well-known interpretations of Kalecki's theory reach opposite conclusions. The
first interpretation, that of Asimakopulos (1983, pp. 224-225,228,232), also aims to link
Keynes's and Kalecki's monetary theories but it affirms that every increase in the investment and income of capitalists as a whole is bound by the amount offinancing,since the
corresponding increase in desired savings is delayed by the time required for the full
operation of the Keynesian multiplier. The second interpretation, that of Patinkin (1982,
pp. 70-71), maintains that Kalecki's determination of the activity level cannot be brought
back to Keynes's, since the former is based on an equality between desired investment and
desired savings at any point in time.
Apart from the questionable reference to the concept of desired savings,1 these
interpretations suggest that Kalecki's analysis of.financing needs some refinements. The
purpose of this paper is to point out that Kalecki does not differentiate enough between the
two different meanings offinancing:the monetaryflowsrequired tofinancean increase in
the demand for capital goods (investmentfinancing),and the monetary advances required
tofinancethe purchase of working capital (production financing). Like Keynes, Kalecki
Manuscript received 13 February 1989; final version received 5 September 1990.
'University of Cassino, Italy. I wish to thank Augusto Graziani and Jan Kregel as well as three anonymous
referees for their helpful comments and criticism of earlier drafts.
1
To define the concept of ex ante savings, it is necessary to assume periods in which active money has
a velocity of transaction equal to one (cf. Robertson, 1940, pp. 6-7; Tiiang, 1980, pp. 469-70). This
Robertsonlan lag does not apply to Kalecki's analysis.
0309-166X/91/030301 + 1 3 $03.00/0

1991 Academic Press Limited

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M.Messori

rightly stresses that the first meaning of finnnring cannot be identified with previous
savings; and he shows that, under reasonable assumptions, any level of investment
finances itself. However, taking into account the 'technical' side of the money market,
Kalecki overlooks the fact that the capitalist class demands whole production financing.1
Our discussion proceeds as follows. First, we sketch the simplest possible Kaleckian
model which includes production but not investmentfinancing.The crucial assumptions
of this model are that inputs come before outputs and the propensity to consume of the
workers is equal to one (Section 1). Then, we examine Kalecki's analysis when the 'technical' side of the money market is left out (Section 2). Kalecki's simplifications imply that the
purchase of working capital does not need anyfinancing.When these simplifications are
eliminated (Section 3) and the 'technical' elements taken into account, capitalists as a
whole require banks'financingin order to carry out their production processes. Kalecki
does not make clear this crucial aspect offinancing(Section 4). From this perspective, an
outline of banks' behaviour shows theroleplayed by the short-term rate of interest in our
Kaleckian model (Section 5). Finally, we summarise our results by a critical reference to
the different interpretations suggested by Kregel, Asimakopulos, and Patinkin.
1. The hypotheses
We assume a closed economic system in which we neglect the role of government intervention. The agents acting in this system are reduced to three groups: the banking system
composed of a central bank and of commercial banks taken as a whole; the capitalist class
assimilated to two sets of firms which produce, respectively, a composite investment
good and a composite consumption good; the aggregate of workers which supplies
homogeneous units of labour. The economic process is defined in a single-period
sequence, where production takes time. The money wage (w) is exogenously determined
and must be advanced before production takes place. The expenditure refers to the
current output; hence it is realised at the end of the period, once production is
completed.2
The central bank holds a monopoly position in the supply of legal tender. Given the
previous assumptions, legal tender can Sow into the economy only through commercial
banks. Thus, the amount of legal tender represents a corresponding debt (AT) of commercial banks with the central bank. It equals the sum total of the banks' reserves (R), which
take the form of non interest-bearing deposits with the central bank, and legal tender held
by the non-bank agents. The central bank exerts an indirect control over bank credit (L)
by means of two instruments: the determination of the rate of discount (u) on banks' debts;
the determination of a minimum reserve ratio (55). The balance sheet of commercial banks
as a whole is:3
1
Following Graziani (1984), we maintain that the puzzling debate on Keynes's finance motive reveals this
same miimHwtanHinfl A few post-Keyncsian authors emphasise the role of production finanring (for
example, Kaldor, 1982; Moore, 1988). However, their analysis of credit supply as demand-determined is
faulty (see Messori, 1991).
2
This last assumption is unnecessary but simplifies the analysis. In fact, we only need a time-lag between
the payment of money wages and workers' demand fox consumption. Under more general hypotheses, this
time-lag can allow for a synchronisation of production.
' In relation to Kalecki's analysis (1933A, p. 37; 1939A, p. 107) we take into account only one kind of
deposit, we leave out the commercial banks' holding and selling of securities, and we neglect open market
operations. Commercial banks pay an interest rate (0 on agents' deposits and charge an interest rate (r, where
r > i, u) on credits. We analyse the problems related to interest payments and to banks' control in Section 5 but
we neglect the question of how firms pay interest on bank credit.

Financing in Kalecki's theory

Assets

Liabilities

R
L

M
D

303

where R^mD ( 0 < m < 1).

Until we discuss Kalecki's analysis of the 'technical' side of the money market (Section
4), we assume that non-bank agents do not hold legal tender, so that bank deposits are the
only medium of exchange and legal tender acts as banks' reserves. In principle, non-bank
agents may hold bank deposits before the start of or over the period. Hence banks' aggregate budget constraint, M=R+ (LD), must be replaced with the two equalities R=M
andL = >.
We assume that, at the end of the period, the workers' propensity to save and the
capitalists' propensity to consume are equal to zero.1 Thus the total demand for the
composite investment good, produced by one of the two sets of firms, depends only on
the expenditure of the capitalist class, and the total demand for the composite consumption good, produced by the other set of firms, depends only on the expenditure of the
workers. The two sets offirmsfixthe price of the two composite goods through a mark-up
(#, and q^ respectively) determined by their degree of monopoly (cf. Kalecki, 1954,
pp. 12-6). Neither set of firms is constrained by the available amount of labour units. So, if
we neglect the liquidity constraints set by paying money wages in advance, firms can hire
the desired amount of labour units {Nl and N& respectively) in order to realise their
desired output (I and C, respectively).
The two sets of firms being price-makers, the amount demanded of the two composite
goods (/ D and C D , respectively) is determined by expenditure. Given the propensities to
consume and investment orders, we assume that both sets of firms realise the expected
amount of sales at the fixed prices. If the time-lag between investment orders and the
corresponding production is neglected or if capital under construction is not included in
inventories, aggregate inventories will remain constant (cf. Kalecki 1933C, p. 2).
The set of firms which produce the composite consumption good receives monetary
proceeds equal to w(Nx+N<J and spends the share w N, of these proceeds to purchase an
amount of the composite investment good (7DC; 7 D C </ D ) at its 'mark-up' price. 7DC is
equal to:
,)

(1.1)

Given the previous assumptions and (1.1), the gross profits of the two sets of firms are,
respectively (cf. Kalecki 1939B, pp. 44-46; 1954, pp. 45-47):
P, = ftWN, = $J/(1 + ?,)

( 1 2)

f = /, + P c = T

(1.3)

Aggregate gross profits are:

As (1.3) shows, investment finances itself. The produced amount of investment goods is
equal to the aggregate gross profit so that, unlike in Patinkin's interpretation (1982,
1

Kaledri (1933C, p. 13; 1935A, p. 343) imi1ti an increase in investment with a corresponding increase
in capitalists' consumption.

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M. Messori

pp. 70-71), it determines an equal amount of savings at the end of the period. The problem
is that the demand for labour can only be realised through the advance of money wages.
Thus, both sets of firms must transfer to workers a share (< 1) of their possible bank
deposits and, if required, must borrow from commercial banks.

2. Investmentfinancingwithout the 'technical' monetary factors

Kalecki (for example, 1933C, pp. 2-4) distinguishes three stages in investment activity:
investment orders; production of investment goods, determined by the ratio between
orders and the investment's construction period; and deliveries of investment goods,
which coincide with orders time-lagged by the construction period. To leave out the
'technical' monetary factors, we must assume that: (a) the construction period takes no
time; (b) the production of the composite consumption good is not influenced by any
increase in the production of the composite investment good.1 Any increase in investment orders implies an instantaneous and corresponding increase in investment deliveries
without altering the amount of consumption.
In this case, Kalecki (1933C, p. 13; 1939B, p. 46) asserts that firms as a whole can
increase investment without having to transfer their bank deposits to other agents or to
borrow from commercial banks. He acknowledges that any increase in investment activity
implies additional expenditure by somefirms.These firms must transfer a share (< 1) of
their possible bank deposits and, if necessary, borrow from commercial banks. However,
the decrease (increase) in their assets (liabilities) with regard to commercial banks taken as
a whole, and the consequent change in the banks' balance sheet, are offset by the proceeds
of the other section offirms.The conclusion is that the asset-liability relationship between
the capitalist class and the banking system does not change.
Given the two possible meanings offinancing,we must ascertain if these remarks refer
only to investment financing or also to thefinancingof the production of the composite
investment good (see Introduction). Kalecki (in particular 1935A, p. 343) does not
specify which are the receivers of the proceeds and which the payers of the expenditures in
firms as a whole. Moreover, he does not clearly state whether there is a time-lag for reequilibrating the aggregate deposits of the capitalist class and for destroying the credit
possibly created by the banks. However, assumption (b) (see above) implies that: the
expenditures must be borne by the section offirmswhich purchase the composite investment good, and the proceeds are realised by the other section offirmswhich produce and
sell this good; the reequilibrating process must be instantaneous (cf. Kregel, 1989, p. 198).
This means that any increase in the demand for the composite investment good will
immediatelyfinanceitself.
This result is only based on assumption (b). As to investment financing, firms do not
change the aggregate amount of their assets or liabilities with regard to the commercial
banks as a whole apart from assumption (a).2 This means that, according to Kalecki, the
demand for the composite investment good canfinanceitself, thanks to the instantaneity
of expenditure and not to the instantaneity of the production of the investment good (see
p. 302, n. 2). Firms earn an interest rate on bank deposits and pay higher interest rates on
1
Cf. Kalecki (1935A, pp. 343-344; 1933B, pp. 83-84). Assumption (b), which is a specification of point (ii)
as stated in the Introduction, is incompatible with an instantaneous income multiplier as well as with the
single-period model sketched in the previous section (see also below and Section 3).
1
Following a concisely worded passage of Kalecki (cf. 1933C, p. 13) which contrasts with Kalecki's full
definition (1935A, pp. 343-344; 1933B, pp. 83-84), Kregel (1989, pp. 200-201) reduces the significance of the
"technical' side of die money market into the opposite of element (b) (or into element (ii) of the Introduction).

Financing in Kalecki's theory

305

banks credit (see p. 302, n. 3). Therefore, if the investment production period takes time,
the firms which demand the composite investment good will not purchase this good (i.e.
will not decrease their deposits or increase their liabilities with regard to the banking
system) during its construction period but at the instant of its delivery. In that same
instant, firms which produce the composite investment good realise the corresponding
proceeds.
This conclusion stresses the ambiguity of maintaining that every increase in investment
of the capitalist class is bound by the amount of financing (cf. Asimakopulos, 1983).
Asimakopulos's thesis depends on the implicit assumption that the firms, which purchase
investment goods, decrease their deposits or borrow from banks in the instant before
the realisation of proceeds by the firms which produce and sell the investment goods
(Asimakopulos, 1983, p. 224; see also: Sawyer, 1985, pp. 93-94; Sebastiani, 1985, p. 105).
But, as we have just stressed, this assumption implies irrational behaviour by the set of
firms purchasing the composite investment good.
Asimakopulos's thesis could be useful with respect to production financing. In the
single-period model sketched above (see Section 1), the given amount of money wages is
paid in advance and workers' expenditure is realised after current production. Hence any
increase in the investment of the capitalist class which raises the amount of money wages
will imply that firms as a whole must transfer an additional share of bank deposits to
workers and, if necessary, must increase the amount of credit demanded to finance their
working capital (see Section 3). The asset-liability relationship between the capitalist
class and the banking system must vary until the aggregate of workers spend their
income in consumption. This interval, which is fixed by the length of the period, cannot
be identified as the time required for the full operation of the Keynesian multiplier (cf.
Graziani, 1986, pp. 8-9). However, it shows that a lack of financing could constrain
production.
Asimakopulos neglects this point.1 If we choose to pursue it, it becomes critical to
allow for production of the composite investment good which takes time. In a two-sector
model, if the production of the composite investment good takes time, so too must the
production of the composite consumption good. Given that the propensity to consume of
the workers as a whole is equal to one but that consumption demand is satisfied by the
current output at the end of the period, the capitalist class must wait for the production
period of the composite consumption good in order to obtain as proceeds the amount of
money wages paid in advance.
In this set-up, it remains true that any level of investment finances itself. However,
production financing is essential. Firms as a whole must increase the amount of money
wages before receiving a corresponding increase in their monetary proceeds. The time-lag
between the payment of money wages and consumption expenditures is determined by the
production period of the composite consumption good. Throughout this production
period, either the assets or the liabilities of the capitalist class with regard to the banking
system must, respectively, decrease or increase. Kalecki can implicitly exclude these
possibilities by means of assumption (a) (see above): the productions of the two composite
goods do not take time. Thus he reduces the economic process to a point of time: the firms'
payment of the money wages and realisation of monetary proceeds are simultaneous. It is
1
Graziani (1984) rmphatitrt it with reference to Keyset's finance concept. Asimakopulos (1985, p. 8)
replies that the financing of working capital with bank credit was not one of the issues in dispute
between Keynes, Ohlin and Robertson . . . ' ; and this same statement is applied to Kalecki's financing (cf.
Asimakopulos, 1983, p. 228).

306

M.Messori

apparent that our previous model (see Section 1 and p. 304, n. 1) does not apply to this
case.
3. Some remarks on financing
Section 2 shows that the abstraction from the 'technical' side of the money market makes it
possible to exclude productionfinancing.However, as we will show below (see Section 4),
Kalecki fails to deal with production financing even when he takes into account the
'technical' side of the money market. To specify the consequences of this failure, we sketch
the functioning of our two-sector Kaleckian model (cf. Section 1) in a single-period
sequence in some detail (cf. Graziani, 1984, pp. 6-11; 1989, pp. 4-8).
The period is subdivided into three phases: the opening, the production, and the closing
phase. The first and the third phase are defined by a set of instantaneous exchanges in
different markets. The productions of the composite investment and consumption goods
take the same span of time, which determines the period's length.1
We start with the economy in a stationary state. In the opening phase, the demand for
labour and the advance of money wages are unchanged with respect to the past. Given our
previous assumptions (see Section 1), the capitalist class must finance the payment of
money wages through its bank deposits or its borrowing from commercial banks. In the
latter case, a credit contractfixesthe repayment of the principal and interests at the end of
the period.2 At the completion of the opening phase, die aggregate balance sheet of
commercial banks shows a decrease in the liabilities or an increase in the assets with regard
to the capitalist class and a corresponding increase in the liabilities with regard to die
workers.
In the third phase firms realise their investment orders and workers realise their
demand for consumption. In this phase the workers' propensity to consume and the
capitalists' propensity to save are both equal to one. Hence the set offirmswhich produced
the composite consumption good obtains an amount of proceeds equal to the aggregate
advance of money wages. The proceeds are shared with the firms which produced the
composite investment good through simultaneous market exchanges of this good (cf. 1.1).
The assumption that die mark-up price of the two composite goods coincides with their
market price implies a specific allocation of the composite investment good between the
two sets of firms (cf. 1.2). In any case, aggregate gross profits are equal to the produced
amount of the composite investment good (cf. 1.3).
Leaving aside the interest payment (see n. 1, this page), at the end of die closing phase
the capitalist class can repay any funds they have borrowed from the banking system.
Commercial banks as a whole cancel their liabilities with regard to workers and enter into a
corresponding amount of new liabilities or cancel their assets with regard to firms. The
asset-liability relationship between the capitalist class and the banking system becomes
equal to that before the opening of the period.
Now assume that, in the opening phase of the next period, there is an increase in
investment orders. To adjust production to the new amount of orders, the set of firms
producing the composite investment good increases the demand for labour and, hence,
the money wages advanced. Given the mark-up of the two sets of firms, the producers of
' In this manner we consider Kalecki's "technical' monetary factors, at least in a simplified form. Kalecki
also assumes that investment's construction takes more than one period (see Section 4 and p. 307 n. 1).
1
As we have already stated (see p. 302, n. 3), in this paper we neglect the question of how firms pay interests
on bank loans.

Financing in Kalectd's theory

307

the composite consumption good must also adjust the level of production to the future
increase in the consumption demand caused by the increase in investment orders.1 Thus
the ratio between the units of labour employed in the two sectors remains constant but the
advanced amount of money wages undergoes an additional increase. In connection with
the accomplishment of the opening phase in the previous period, the aggregate balance
sheet of commercial banks shows a larger decrease in the liabilities (or a larger increase in
the assets) with regard to the capitalist class, and a corresponding larger increase in the
liabilities with regard to the aggregate of workers.
It is apparent that, in connection with the closing phase of the previous period, the two
sets of firms receive larger amounts of the composite investment good and monetary
proceeds. However, given that the ratio between the units of labour employed in the two
sectors is unchanged, their allocation is not altered (cf. 1.1 and 1.2). As (1.3) shows, firms'
aggregate gross profits increase. The asset-liability relationship between the capitalist
class and the banking system is constant.
This outline of the functioning of our two-sector Kaleckian model in a single-period
sequence stresses the following points.
(i) Leaving aside the hypotheses of instantaneity and synchronisation of productions,
at the opening phase of any period firms must finance the aggregate amount of money
wages. Hencefinancingis required for the whole production, whether the economy is in a
stationary or a growth state (cf. Graziani, 1984, p. 22; 1989, p. 6).
(ii) The financing of the amount of money wages decreases (increases) the assets
(liabilities) in the balance sheet of the capitalist class with regard to the commercial banks
as a whole, until the aggregate of workers spend this amount on the consumption good
market at the closing phase (cf. Graziani, 1989; Sawyer, 1985, p. 94).
(in) Given that the aggregate of workers have a propensity to consume equal to one in
the third phase of the period and that the investment's construction takes one period (see
p. 306, n. 1), the aggregate demand for investment, both unchanging or increasing,
does not require additional financing.1 The investment purchase plays only a role in
redistributing the monetary proceeds, which are equal to the amount of money wages,
and the aggregate gross profit, which is equal to the amount of the composite investment
good.
(iv) Whether the economy is in a stationary or in a growth state, at the closing phase of
any period the asset-liability relationship between the capitalist class and the banking
system is identical to that in the previous period. This means that the amount of bank
credit which thefirmsmay have borrowed at the opening phase of a given period must be
returned and destroyed at the closing phase of this same period.

4. Kalectt's 'technical' monetary factors

Points (i)(iv) of the previous section make clear that it is incorrect to restrict the analysis
offinancingto an increase in investment. In our two-sector model this financing is never
required. On the contrary, if the production of the composite consumption good takes
' In this way we take into account the second element which, according to Kaledri, defines the "technical'
side of the money market (see Introduction). To justify the instantaneous adjustment of the production of the
composite consumption good, we might assume that the increase in investment orders is 'common knowledge'
and, as a consequence, acts as a perfect market signal.
1
This statement would not be valid but for additional assumptions in a microeconomic analysis of the
investment demand. Here we ignore mis complication.

308

M. Messori

time, the capitalist class will needfinancingto pay the money wages in advance. Moreover,
without government intervention and external exchanges (cf. Section 1), point (iv) makes
puzzling the need to maintain thatfirmsas a whole hold bank deposits at the opening phase
of any period. The only possible source of these deposits is bank credit obtained in the
opening phase of some previous period and not reimbursed at its closing phase. But,
following point (iv), this is equivalent to the affirmation that commercial banks renewed
their credits. Thus we may hereafter assume that the aggregate of firms must finance the
entire amount of money wages through bank credit. This assumption does not affect
Kalecki's analysis of the 'technical' side of the money market and allows for his hypothesis
that bank credit is then funded by loans on the financial markets. However, this analysis
mixes up investment financing and production financing.
Kalecki assumes that investment orders, decided at time (t), are realised at the end of the
construction period of the composite investment good at time (t+j;j> 1). With respect to
our previous single-period sequence (cf. Section 3), this means that the production of the
composite investment good takes more than one period (cf. Kalecki, 1933C, p. 2). Kalecki
(1939A, pp. 107-10; see also 1933A, pp. 37-40) offers two alternative scenarios to show
that this time-lag between investment orders and investment deliveries makes positive the
amount of financing borrowed by the capitalist class.
(a) The amount of financing borrowed from the commercial banks as a whole at (r) is
determined by the expenditure to be made for the construction period of the composite
investment good during the interval [(i +1) r]. At (t +1) this financing is repaid through
a loan of equal amount, which is funded by savings accumulated during [(r+1) r] and
allocated in securities at (r+1); 1 commercial banks as a whole grant new financing, equal
in amount to that at (i). Moreover, an equivalent amount of savings is accumulated during
[(t + 2) (t+1)] and is allocated in securities at (f+2). These mechanisms imply that any
increase in investment has only temporary effects on bank credit. Assuming that investment orders increase at (t+2), the consequent addition to the advances will be met from
the increased accumulation of savings at (t+3).
(b) The amount of financing borrowed from the commercial banks as a whole at (r)
is determined by the expenditure to be made for the entire construction period of the
composite investment good during the interval [(t+j) t] (cf. also Kalecki, 1935A, p.
344; 1933B, pp. 83-4). This financing creates a bank deposit called 'investment finance
fund'. In the intervals [(r+1)t],... ,[(.t+f)(t+j 1)], the expenditures for the construction period of the composite investment good imply corresponding decreases in
the 'investment finance fund' but corresponding increases in savings. Savings feed a
bank deposit called 'intermediate savings fund'. At (t+j), when the construction period
ends, the 'investment finance fund' disappears and the 'intermediate savings fund' is
equal to the amount of initial financing. Kalecki (1939A, p. 109; also 1933A, p. 39) can
thus affirm: 'the loan then floated in order to fund this credit is exactly taken up by the
accumulated savings'. An increase in investment orders increases the two funds just
mentioned.
Kalecki comes to the conclusion that, especially in scenario (b), any increase in investment leads to a rise in bank credit and, hence, to 'credit inflation'. This effect is
1
KalecM(1939A,p.lll)fTU in tains that iccuritietareoffered by the banking system to transfer its assets to the
saver*. However he adds that it would be possible to assume that savings are ' . . . devoted partly for the
repayment of advances'(Airf., p. 110). In this case,'a part ofthe loans floated is then not taken up by savers but
the banks are pro unto relieved from advances and enabled to take up loans instead'. Given our assumptions on
banks balance sheets (see p. 302, n. 3), we allow for a direct exchange of securities between savers and spenders.

Financing in Kalecki's theory

309

strengthened by two additional elements. The increasing production of the composite

investment good implies an increase in the aggregate output and in the prices of the two
composite goods.1 In turn, these elements raise the demand for money for transactions,
also defined as money in circulation (cf. Kalecki, 1933A, pp. 38-39; 1933C p. 13; 1935A,
p. 344; 1939A, p. 108). The last implication is only valid if we remove the assumption that
bank deposits are the only medium of exchange (see Section 1). The increased demand for
money in circulation means a rise in the legal tender held by non-bank agents, and a
corresponding decrease in their bank deposits as well as in the banks' reserves (cf. Kalecki,
1939B,p.46).
The problem is that Kalecki never specifies which agents are, respectively, the spenders
and the savers in scenarios (a) and (b). In our single-period sequence (cf. Section 3, points
(i)(iv)), the spenders are the set of firms which advance money wages to hire the units of
labour necessary for the production of the composite investment good, and the savers are
the set of firms which produce and sell the composite consumption good.
Let us apply this interpretation to Kalecki's analysis. Since the workers' propensity to
consume is equal to one at the end of every period, the producers of the composite
consumption good also receive- as monetary proceeds the amount of money wages
advanced by the producers of the composite investment good, and accumulate this share
of proceeds as savings while waiting for the end of the investment construction period.
They use these savings either to buy interest-bearing securities issued by the producers of
the composite investment good in order to repay their debts to banks (see scenario (a) and
p. 308, n. 1), or to feed the 'intermediate savings fund' (see scenario (b)). The rise in the
demand for transaction money is due to the rise in the amount of money wages advanced
by both sets offirmsand, hence, in the money held by the aggregate of workers during the
production of the composite consumption good.
This interpretation allows for the analysis of production financing. However it cannot
justify two aspects of Kalecki's scenarios (a) and (b): (i) the set of firms which produce the
composite consumption good demand financing only to hire their additional units of
labour; (ii) the increases in output and prices determine the rise in the transactions
demand for money. Given that the producers of the composite consumption good do not
use their previous savings to advance wages, our interpretation implies that both sets of
firms must demand an amount of financing equal to the advance of their total amount of
money wages; and that the rise in the demand for transaction money is due to the increase
in these amounts.2 Moreover, Kalecki (1939A, p. 107) affirms that his scenario (b) is
more general than his scenario (a). But within the limits of Asimakopulos's position (cf.
Section 2), our interpretation implies that one of the two sets of firms behaves irrationally
in scenario (b). The investment producers demand an amount of financing greater than
their current advance of money wages so that they hold bank deposits which bear an
interest rate lower than that on their debts.
1

Kregel (cf. 1989, pp. 201-202) maintains that Kalecki does not "plain why prices increase. This criticism
would apply to our two-sector Kaleckian model where raw materials are not separated from investment
finished goods. However, Kalecki stresses that changes in the prices of the former are determined by changes
in demand, and changes in the prices of the latter by changes in costs of production. This allows a link between
increases in output and in prices of any good, being the price of raw material*a component of the cost of
finished goods (cf. Kalecki, 1954, pp. 11-12; 1939B, pp. 53-54).
2
According to Kregel (1989, p. 200-201), the increase in the demand for money in circulation depends
firstly on the increased income of the capitalist class; workers raise their transactions demand for money in
consequence of the increase in prices. This shows that Kregel overlooks production finanring and focuses his
attention on payments within the capitalist dass (investment finanring)

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M. Messori

5. Short-term rates of interest

The flaws in Kalecki's analysis of the 'technical' monetary factors imply some looselydefined areas in his determination of the rate of interest also. Kalecki (1933A, p. 41)
acknowledges that the credit supply and the transfers in the aggregate balance sheet of
commercial banks, owing to thefinancingof increased investment, raise the interest rate.
Moreover, he maintains that the securities issued by the set of firms which produce the
composite investment good or by commercial banks as a whole to fund their previous
credits (see p. 308, n. 1) are placed on the market at rising rates of return (cf. Kalecki,
1938A, pp. 111-113). However, Kalecki (1933C, p. 14; 1935B, pp. 29-30) focuses his
attention on the relationships between the changes in the demand for money in circulation
and in the interest rate: if the banking system does not support the increase in the demand
for money in circulation which follows from the increase in investment, the rate of interest
will rise; and, if substantial, this rise can limit economic expansion.
Given Kalecki's analysis of the 'technical' monetary factors, the rationale of these
statements is obvious. Kalecki maintains that the short-term rate of interest changes more
than die long-term one.1 Financing the demand for transaction money depends on die
short-term rate of interest, whereasfinancinginvestment orders directly (see scenario (b),
Section 4) or indirectly (see scenario (a), Section 4) depends on the long-term rate of
interest. Moreover, Kalecki concentrates on an increased transactions demand for money
probably to stress that thisfinancingimplies a fall in agents' banks deposits and in banks'
reserves (see Kalecki, 1939B, pp. 46-47).2
Our re-intcrprctation of the 'technical' monetary factors makes it meaningless to distinguish increases infinancingon the grounds of increases inin vestment or in transactions
demand for money. If the production of the composite investment good takes more than
one period (see Section 4), it will be true that the producers of this good must issue new
securities in the financial markets at the end of each period and pay a long-term rate of
interest on them. Nevertheless, this issue is needed in order torepaydie bankfinancingof
the advance of money wages in die investment sector at the opening of die corresponding
period. This financing, which involves die determination of short-term rates of interest,
also applies to die production of die composite consumption good.
Hence our concern is only widi Kalecki's determination of die short-term rate of
interest and, in particular, widi his conclusion (1939A, pp. 111-112; 1935B, pp. 29-30)
that die central bank can avoid (allow for)risesinfinancingwhich implyrisesin die shortterm interest rate dirough easy (tight) money. We aim to show diat a similar conclusion
will hold if we interpret Kalecki'sfinancingas production financing.
In this respect, die amount of money wages is equal to die total amount of bank credit
(L). Let us assume diat non-bank agents hold legal tender: during die production of die
composite consumption good, die aggregate of workers may convert a share of the wages
in legal tender. This share (/) depends on institutional factors (), taken as given, and on
die level of die interest rate (t; i >0) paid by die commercial banks as a whole on workers'
deposits:
J=/(!,i)

(5.1)

1
A full description of Kalecki's theory of the long-term rate of interest is offered in Kalecki (1954, pp.
73-88) (see alto: Sawyer, 1985, pp. 96-101; Sebastiani, 1985, pp. 107-112).
1
Kregel (1989, pp. 201-202) argues that Kalecki doei not give any explanation for 'the question of why an
increase in transactions demands... should cause an increase in the rate of interest'; and that all the reasonable
explanations for this last increase do not explain why the increases in investment would be stopped.

Financing in Kalecid's theory

311

where depends on the degree of competition for deposits and on the central banks'
discount rate (see n. 3, this page).
Thus, given the balance sheet constraint [M=R + (LD)] and the commercial banks'
minimum ratio of reserves to the agents' deposits (R=mD) (see Section 1), during the
production of the composite consumption good, banks' aggregate deposits and the balance
sheet are, respectively, determined by:1
D = L(l - /)
Af = m L - ( m - 1 ) / L

0<mJ<l

(5.2)
(5.3)

where D denotes workers' deposits with commercial banks as a whole, M banks' aggregate
debt with die central bank which charges on it a rate of discount (u); R banks' aggregate
reserves in legal tender.
Assume that, like the price of the two composite goods, the short-term rate of interest on
credit isfixedby applying a mark-up (k) on the unit direct costs of commercial banks as a
whole.2 Given (5.2) and 5.3), this implies:
r = [(mu + 0(1 - /) + /u/(l + *)]

(5.4)

If the investment orders increase, the capitalist classes' demand forfinancingmust rise
(see Section 3). (5.3) shows that commercial banks as a whole may provide this increased
financing and, in the meantime, may fulfill their constraints only if one of the two conditions occur: (1) the aggregate of workers decreases /; (2) given m, the centra] bank
increases Af. E being given, condition (1) requires an increase in t (see 5.1) which is
strengthened by the fact that, at a microeconomic level, banks' degree of competition for
deposits rises (see above; and Kalecki, 1933A, p. 41). This increase in i implies a rise in r.
Instead of condition (1), the central bank can fulfil condition (2) acting as a 'lender of last
resort' (cf. for example, Tobin, 1982, pp. 506-507). It follows that the central bank can
bind the amount of credit offered by commercial banks as a whole only through changes in
the rate of discount. Whether or not the fulfilment of condition (2) requires an increase in u
and, hence, in r depends on the monetary policy of the central bank.3
This result supports Kalecki's conclusion: short-term interest rates will or will not rise
when the demand forfinancingincreases according to the tight or easy money policy of the
central bank. However, Kaleckian analysis of banks' behaviour could be improved.
Kalecki (1967, p. 152; see also: Kregel, 1989, p. 195) argues that capitalists decide their
investment at a microeconomic level, not as a class. In our set-up, this also implies that
production decisions are taken at a microeconomic level. Hence the analysis of production
financing could be developed through a microeconomic determination of the credit contracts between commercial banks andfirms.This development would allow us to include
in Kalecki's model two results reached in the literature: apart from the discount rate
policy, short-term rates of interest tend to increase when the demand for credit increases
because of the different default risks of different borrowers; bank credit can be rationed.
1
The optimal reserve ratio of commercial banks depends on u, E, and i (tee 5.1). Assume, for sake of
simplicity, that the minimum reserve ratio (HI) coven this optimal reserve ratio.
' We abstract from banks' labour costs. We maintain that, in Kalecki's framework, banks andfirmsare
institutionally separate. As a consequence, we do not relate kxoqlotqct where q, and qc are the mark-up of the
two sets of firms.
' This also clarifies why i and its changes directly depend on the discount rate policy (see above). We have:

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M. Messori

Conclusions
Further investigation offinancinghas shown that Kalecki, in concentrating on investment
financing, neglects production financing. This result makes it possible to criticise the
different interpretations suggested by Kregel (1989), Asimakopulos (1983), and Patinkin
(1982).
Unlike Patinkin, who ascribes to Kalecki the restoration of an ex ante link between
savings and investment, we have proved that Kalecki's equality between investment
and savings results from investment orders and consequent production. Unlike
Asimakopulos, who constrains investment activity owing to a lack of savings and thus
poses a theory of loanable funds, we have proved that the time-lag for the full operation of
the Keynesian multiplier is of no account in Kalecki's financing.
Kregel correctly asserts that these two interpretations lead to a similar misunderstanding of income distribution and of investment financing in Kalecki's model, even if they
start from the opposite analysis. However, Kregel overlooks that firms needfinancingto
advance money wages and to carry out their production. This leads to the statement that
Kalecki's income distribution does not depend on monetary elements (cf. Kregel, 1989,
p. 193). In a sense, this is true since the profit-wage ratio is determined by thefirms'markup. However, the analysis of production financing stresses that the short-term rates of
interest become a component of the firms' production costs. Thus these rates, as well as
any possible form of credit rationing, constrain the level of activity and the related amount
of wages and profits. Moreover, these rates determine the gross profit distribution
between firms and banks.
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