Must-Read: John Maynard Keynes (1936): The General Theory of Employment, Interest and Money, Chapter 13
Must-Read: John Maynard Keynes (1936): The General Theory of Employment, Interest and Money, Chapter 13:
The three divisions of liquidity-preference….
- the transactions-motive, i.e. the need of cash for the current transaction of personal and business exchanges;
the precautionary-motive, i.e. the desire for security as to the future cash equivalent of a certain proportion of total resources; and
the speculative-motive, i.e. the object of securing profit from knowing better than the market what the future will bring forth….
A highly organised market for dealing with debts presents us with a dilemma…. In the absence of an organised market, liquidity-preference due to the precautionary-motive would be greatly increased; whereas the existence of an organised market gives an opportunity for wide fluctuations in liquidity-preference due to the speculative-motive…. Circumstances can develop in which even a large increase in the quantity of money may exert a comparatively small influence on the rate of interest. For a large increase in the quantity of money may cause so much uncertainty about the future that liquidity-preferences due to the security-motive may be strengthened; whilst opinion about the future of the rate of interest may be so unanimous that a small change in present rates may cause a mass movement into cash. It is interesting that the stability of the system and its sensitiveness to changes in the quantity of money should be so dependent on the existence of a variety of opinion about what is uncertain. Best of all that we should know the future. But if not, then, if we are to control the activity of the economic system by changing the quantity of money, it is important that opinions should differ. Thus this method of control is more precarious in the United States, where everyone tends to hold the same opinion at the same time, than in England where differences of opinion are more usual….
The propensity of the public towards hoarding… determine[s] the rate of interest at which the aggregate desire to hoard becomes equal to the available cash. The habit of overlooking the relation of the rate of interest to hoarding may be a part of the explanation why interest has been usually regarded as the reward of not-spending, whereas in fact it is, the reward of not-hoarding…