The original meaning of 'Liquidity Trap' in the early discussions between Robertson and Keynes

The concept of ‘liquidity trap’ has recently seen a revival in macroeconomics. Its definition, however, is not univocal. It may be useful, therefore, to turn back to the original meaning of this expression in the works of the economists that first introduced it into economic analysis, namely John M. Keynes and Dennis H. Robertson. In fact, the possibility that, under certain circumstances, expansionary monetary policy might prove ineffective in lowering the interest rate was first envisaged by Keynes in the General Theory (1936), while the expression ‘liquidity trap’ was first used by Robertson in his Essays in monetary theory (1940) to describe the possible role of hoarding in perpetuating economic depression. Very few studies have been devoted to investigating the evolution of the concept of ‘liquidity trap’ in the history of economic thought, and relevant archival documents remain to be explored, particularly from the correspondence between Robertson and Keynes. Building on primary sources and unpublished material, this chapter provides a reconstruction and contextualization of the original use of this expression in economic analysis with the aim of contributing to a better understanding of its meaning. In particular, it highlights that in the early theoretical debates among the first economists who addressed this issue the notion did not designate merely a specific circumstance, characterized by the ineffectiveness of monetary policy at the zero lower bound, or at low interest rates, but referred to a more general problem concerning the nature of liquidity as a shelter from uncertainty and the related structural tendency of a monetary economy towards stagnation.