Liquidity, solvency and regulation in the Classical–Keynesian theory of crises*

This essay sets forth a Classical–Keynesian theory of crises, derived from the joint works of Keynes and Sraffa, including the latter’s 1922 Economic Journal article on the Italian banking crisis and the Lectures on Continental Banking that he gave in Cambridge, which relate the analysis of liquidity to the organisation of financial markets, of regulation and of the policy of the monetary authorities. The Classical–Keynesian approach is shaped by the conflicts over income distribution that mould the institutional organisation of financial markets. The paper uses it to interpret the 1929 and 2007 financial crises. More specifically, it asserts that the pressures of the banking industry on the political authorities were the main cause of the two crises. These pressures succeeded in changing regulation and transforming the US financial system from ‘specialised’ into ‘universal’ before the crisis of 1929 and also prior to the crisis of 2007.