Michal Kalecki on quantitative easing

Michal Kalecki, the Polish Jewish economist who in many ways is a co-discoverer of the economic insights associated with John Maynard Keynes in an essay published in a collection The Economics of Full Employment in 1944 by the Oxford University Institute of Statistics published by Basil Blackwell also wrote briefly about what has come to be known as quantitative easing. Kalecki's essay was called Three ways to full employment. In his discussion of deficit financing he posed the question of where does the money come from to finance deficit spending  and how do we prevent the interest rate from rising so much so as to reduce private investment by an amount which offsets the stimulating effect of government expenditures(the so called treasury view which these days is known as crowding out). with respect to where does the money come from Kalecki shows that the budget deficit plus gross private investment equals gross savings since in a closed economy national expenditure equals national income plus tax revenues.Once depreciation is deducted from both sides we have net savings equal to the budget deficit plus net investment. He concludes ''whatever the level of prices, wages or rates of interest, any level of private investment and budget deficit will always produce an equal amount of saving to finance these two items."(p.41)

He then goes on to discuss the problem of crowding out. He argues that the rate of interest can be maintained at a stable level however large the Budget deficit provided an appropriate banking policy is followed by the central bank. If the public prefer to invest their savings in bank deposits and they as well as the banks do not buy government securities in the requisite amounts to keep interest rates from increasing this could result in interest rates rising. However, if the central Bank expands the cash basis of the banks by purchasing debt instruments ''no tendency for a rise in the rate of interest will appear." (p.43) He concludes:
''provided the central bank expands the cash basis of the private banks according to the demand for bank deposits, and that the Government issues long and medium term bonds on tap, both the short term and long term rates of interest may be stabilized whatever the rate of the Budget deficit."(p.42)

Abba Lerner somewhat later also wrote about these issues in his work on functional finance. So the roots of what is now called quantitative easing lie in the Keynesian Kaleckian monetary and fiscal theory debates of the 1930s and 1940s with a special place also allocated to the Japanese finance minister Korekiyo Takahashi in the early 1930s. Kindleberger shows that Takahashi was already familiar with Keynes' work and his advocacy of deficit finance and the role of the multiplier by the early 1930s. His use of quantitative easing followed logically from this knowledge.(See C.Kindleberger, The World in depression 1929-1939, p.163) It was these discussions and debates which inspired me to write about these policy options in the 1980s and early 1990s when I presented these ideas in articles, monographs and  debates about financing the deficit in Canada during that period. My colleagues the late John Hotson of Waterloo and Mario Seccareccia of the Université d'Ottawa also co-authored one of the publications.