This paper solves the century old puzzle about interest rate with Adam Smith's “Of Stock Lent at Interest”. Interest rate is resulted from the interactions between the borrowers and lenders. It is a function of the default rate of lending and the capital's cost, but it also depends on...

This paper disproves the Keynesian Liquidity theory and the IS-LM model. An alternative monetary theory is developed based on Adam Smith's Wealth of Nations. Although interest rate is lowered by monetary expansion, there is no definite effect on output and employment, because of the chaos and...