A Post Keynesian View of Liquidity Preference and the Demand for Money

A Post Keynesian View of Liquidity Preference and the Demand for Money
Author(s): Paul Wells

Source: Journal of Post Keynesian Economics, Vol. 5, No. 4 (Summer, 1983), pp. 523-536
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PAUL WELLS
A post Keynesian view of liquidity

preference and the demand for money
Perhaps to render a particularly clear exposition of his altogether

new and fundamentally important theory of liquidity preference,1
Keynes in his General Theory postulated an extremely simple fi-
nancial structure. He selected a structure which contained just two
intangible assets: money and bonds. Money served as the sole me-
dium of exchange and as one of two stores of value. It followed
that a part of the money supply would be held in active balances
to finance transactions on GNP account, while the remainder nec-
essarily would be lodged in inactive balances or hoards. The bond
rate of interest, i.e., the rate of interest relevant for the determina-
tion of the level of investment spending, was established in the
money-bonds market by a process which adjusted the quantity of
hoards demanded to match the supply of hoards available.
But why, Keynes was later to ask, ". .. should anyone outside a
lunatic asylum wish to use money as a store of wealth?" (1937a,
p. 216). His reply, we know, was that money was held in hoards
as a hedge against incertitude. Incertitude due to the unavoidable,
indisputably pervasive fact that ". . . our knowledge of the future
The author is Professor of Economics, University of Illinois. He wishes to

acknowledge a general indebtedness to the work of Paul Davidson, Alexander
J. Field, and Sidney Weintraub. In addition, he is grateful to Sidney Wein-
traub for help privately communicated.
1 Paul Davidson (1978) and G. L. S. Shackle (1974) have brought to our at-
tention that strong elements of liquidity preference theory are to be found in
Keynes's Treatise on Money (1930).
Journal of Post Keynesian Economics/Summer 1983, VoL V, No. 4 523
524 JOURNAL OF POST KEYNESIAN ECONOMICS
is fluctuating, vague, and uncertain . .." (1937a, p. 213, emphasis

added). Liquidity preference, Keynes's theory of intangible wealth
placement in the kaleidoscopic world of uncertainty, was his an-
swer to this question. Keynes observed that
Because, partly on reasonable and partly on instinctive grounds, our
desire to hold money as a store of wealth is a barometer of the degree of
our distrust of our own calculations and conventions concerning the fu-
ture. Even though this feeling about money is itself conventional or in-
stinctive, it operates, so to speak, at a deeper level of our motivation. It
takes charge at the moments when the higher, more precarious conven-
tions have weakened. The possession of actual money lulls our disquie-
tude; and the premium which we require to make us part with money is
the measure of the degree of our disquietude. (1937, p. 216)
G. L. S. Shackle, in support of Keynes, has brought beautifully

to light the root causes of uncertainty, the root need for liquidity.
He wrote that incertitude is the resultant of a
... universally relevant truth.... That truth is our essential, incurable

and merciful un-knowledge of what may be the sequel of our choices of
action. We cannot be eyewitnesses of the future. The future if we take
the word literally is something which is not yet.... Our conception of
history-to-come is necessarily figment, however, subtly we combine the
evidence provided by the past, and despite the reliance we can and must
place on the regularities of the physical world. These regularities are like
rigid, precisely-shaped building blocks, with which, despite their definite
and stable individual form, buildings of infinite variety can be built.
(1974,p.27)
Shackle has shown that the need for liquidity is a necessary eco-
nomic response to the unknowable and infinitely variegated fu-
ture which always lies ahead. Liquidity is valued in an uncertain
world because it affords economic units the option of not com-
pletely hostaging their own economic future to the uncertain fu-
ture of the economy. Its possession grants businesses and house-
holds the flexibility to rearrange their economic plans, to redeploy
their wealth as the future slowly unfolds and becomes history, as
knowledge is gained and unknowledge lost with the mere passage
of time.
In brief, this is Keynes's theory of liquidity preference. And
from just this description we can understand why his theory, as it
was recast by succeeding generations of writers, became discon-
nected from Keynes's explicit recognition of the central impor-
LIQUIDITY PREFERENCE AND MONEY DEMAND 525
tance of time and uncertainty, of liquidity and liquidity prefer-

ence. The disconnection came about largely because the fact that
"our knowledge of the future is fluctuating, vague, and uncer-
tain" proved to be a concept far too ephemeral to support modern
quantitative model-building research.2 Keynes's concepts are real,
but they are necessarily so vague and imprecise that model build-
ers could not well incorporate these phenomena into their analy-
tics. Instead of dealing directly with this problem, conventional re-
searchers tended to freeze the state of liquidity preference and
then postulate stable interest-elastic demand functions for money.
This substitution of stable functions for inherently unstable real
world phenomena gave researchers the solid foundation they
needed upon which to develop their models. And so ". .. the soul
of Keynes's theory" (Shackle, p. 27) became little more than a
well-behaved demand-for-money equation.3
To freeze the state of liquidity preference, even for the purpose
of exercising a model, is to obliterate many of Keynes's funda-
mental insights. It is to trample on the fact that economic deci-
sions made today are based on current necessarily nonscientifically
grounded assessments of the future. With the passage of time the
future becomes history; but a future, a different future, continual-
ly lies ahead. Each day new views are formed, plans revised, proj-
ects reined in, others embarked upon. The time-consuming flow
of economic activity validates some expectations, falsifies others,
and leaves still others hanging. The simple passage of time alters
liquidity positions and so changes the needs for liquidity. Thus to
take the state of liquidity preference as given and subject only to
parametric change is to abstract from an essential dynamic prop-
erty of the real world. To hold liquidity preference constant for
the purpose of analysis is to hold unchanged expectations and
planned liquidity needs while all other economic activities within
the confines of a particular model proceed apace. Although this sac-
rifice of time and uncertainty by researchers did yield a flood tide
of theoretical and econometric models, all too many of these models
have been aptly characterized by Minsky as being ". .. either
trivial... incomplete... inconsistent, or indistinguishable from
those older quantity-theory models .. ." (Minsky, p. 53).
2 See C. Alan Gamer (1982) for a concise discussion of this point.
3 For a comprehensive analysis of the relation between money, uncertainty,
and liquidity preference, see Paul Davidson (1978).
II
In the decades following the publication of the General Theory

economists came to realize that even though Keynes's money-
bond model was an admirable expository device, it was far too
simple to be of long-run service. Even as Keynes wrote, and most
certainly today, common stock, insurance policies, long- and
short-term public debt, and even plain old savings accounts were
available to the public as substitute stores of wealth. With the ex-
plicit recognition of this vastly larger array of assets, two substan-
tial analytical problems emerged. The first was to generalize li-
quidity preference theory to encompass the real world's multi-
plicity of intangible assets and specific rates of interest. This prob-
lem was largely solved by the work of a number of economists,
with the contributions of Joan Robinson (1950), R. F. Kahn
(1954), and Paul Davidson (1978) being especially valuable in this
regard. But with this problem solved, and especially with it solved,
a second problem plaguing Keynes's theory came more clearly into
view. Surprisingly, this second problem has once again to do with
his question: "Why should anyone outside a lunatic asylum wish
to use money as a store of wealth?"
This question returns simply because of the wide variety of
short-term, highly liquid assets which are available to the public.
For some long period of time, wealth owners have had the option
of holding liquidity in the form of savings deposits, NOW ac-
counts, money market funds, certificates of deposit, and numer-
ous other short-term debt instruments. These instruments are nor-
mally no riskier than money and are virtually as liquid as cash. But
they do have the decisive advantage of yielding their owners an in-
terest income. Because of this signal advantage, they dominate
money as a store of value. Thus in today's world there is no reason
whatsoever for the wealth owners to store even the smallest frac-
tion of their accumulated savings in idle cash balances. Speculative
balances and larger order precautionary balances held to satisfy
the need ". . . to hold an asset of which the value if fixed in terms
of money to meet a subsequent liability in terms of money"
(Keynes, 1936, p. 190) would not be held in cash.4 Instead, li-
4 Those smaller-order precautionary balances which all of us hold "To enjoy a

sense of independence and the power to do things, though without a clear
idea of definite intention of specific action.. ." (Keynes, 1936, p. 108) are
better viewed as an element of the economy's transactions demand for
money. See p. 528 below.
quidity would be held in the form of short-term interest-bearing

assets. Bank lines of credit and overdraft facilities also serve as
nonmoney sources of liquidity. In sum, these instruments and fa-
cilities render fallow the store-of-wealth function of money. As
idle cash balances made their appearance here and there in the
economy, they would not be held idle for long. They would be
placed in short-term debt, used to reduce short-term debt, or just
plain spent. Above all, they would not be held dormant for any
appreciable period of time.
Although there are many superior substitutes for money as a
store of value or means of holding liquidity, it nevertheless re-
mains true that there are no satisfactory substitutes for money as
a medium of exchange. With the latter now being money's sole
function, it follows that the entire stock of money would at all
times be held in active transactions balances awaiting near-term
expenditure. Money, it appears, is in the nature of an intermediate
good, a good which serves as a means to an end. Money carries too
little return for it to be held for its own sake.
III
We shall now attempt to develop a more modern and comprehen-

sive version of Keynes's money demand function and theory of
liquidity preference. We begin by reformulating the economywide
demand for money to exclude the holding of idle cash balances.
But more importantly, we shall reformulate this function to in-
clude the obvious but analytically neglected fact that money is
used to purchase existing assets just as it is used to purchase those
goods and services connected with the production and sale of the
economy's flow of final product. Next we investigate the market
mechanism which determines the short-term rate of interest. Fol-
lowing this the role liquidity preference plays in determining the
long-term rate of interest is examined. Last, Keynes's theory is
generalized to show that liquidity preference considerations direct-
ly affect the markets for final goods and services, for secondhand
tangible assets, and for financial assets. It has long been under-
stood that liquidity preference considerations directly affect fi-
nancial markets and so indirectly affect the remaining markets of
the economy. What has not been so well understood is that the
markets for final product and tangible assets too are directly af-
fected by bull-bear changes in liquidity needs.
To reformulate the aggregate demand for money function so
that it captures the twin facts that money is used to finance pur-
chases both on GNP account and non-GNP account, we shall fol-
low the lead of Paul Davidson (1978), Alexander J. Field (1981),
and G. L. S. Shackle (1974) and return to Keynes's Treatise on
Money (1930) for our primary insights. The reason being that in
the Treatise Keynes recognized the asset exchange use of money
and made this real world phenomenon central to the analytics of
that work.
Keynes divided the economywide mass of money expenditures
into two great circulations. One of these consisted of money in
"industrial circulation," the other of money in "financial circula-
tion" (1930, Vol. 1, p. 243). Money in industrial circulation is
those funds which are being used to finance the purchase of goods
and services directly connected with the production, distribution,
and sale of the economy's flow of final product. Money moving in
this circulation would consist, in part, of those balances held by
individuals to finance their purchases of newly produced consumer
goods and capital goods such as newly constructed houses, auto-
mobiles, appliances, and so forth. They would also include a mea-
sure of precautionary monies to finance those frequently occur-
ring yet unplanned expenditures on final product.5 Just as expen-
diture depletes these balances and releases finance to the sellers of
goods and services, these balances are replenished by inflows of
money from the sale of factor services, from gifts and transfer pay-
ments, from the sale of tangible assets, and from borrowing. The
business component of industrial circulation would be made up of
those balances used to finance the purchases of factor services
from individuals and other businesses and to finance the purchase
of newly produced materials and finished goods from other busi-
nesses. These balances are replenished by the sale of goods and ser-
vices, by the sale of tangible and intangible assets, and by issuing
debt. It is apparent from this brief description that the demand for
5 Examples of such precautionary balances held for unplanned but doubtless

arising small-ticket expenditures would be the occasional purchase of a su-
perior wine, a good meal, a new hand tool. These unplanned but always aris-
ing expenditures add needed variety to consumers' spending patterns and so
release them from the dulling tedium of budgeting their expenditures down to
the last few dollars of their income. On the need for variety, see Tibor Scitov-
sky (1978). In addition, Sidney Weintraub has pointed out that these bal-
ances include what might be called anticipatory balances, monies briefly held
by businesses to finance expansions of their levels of activity.
money to effect this mass of expenditures is closely related to the

transactions demand for money of the General Theory.
In addition to financing transactions on GNP account, money
must be used to finance transactions on non-GNP account. Money
is used, used constantly, used over and over again to finance the
purchase of secondhand assets. Massive volumes of common stocks,
bonds, bills are daily bought and sold. Existing land and structures
are daily placed on the market. Outstanding debt is retired, new
debt is floated. Estates are settled, insurance claims cleared, busi-
nesses liquidated, and legal suits settled. All on a daily basis. Sec-
ondhand automobiles, furniture, appliances move to and from
market. Stamps, coins, precious stones, gold, silver, carpets, and
Rodins are bought and sold in countless numbers of markets strung
across the breadth of the economy. Corporations, small businesses,
medical and legal practices too are marketed. This enormous range
and volume of transactions also requires the use of money as a
means of settlement. Again, just as expenditure depletes these bal-
ances and builds the balances of others, replenishment occurs by
way of earned income, the sale of assets, and by borrowing. The
money these transactions utilize, and the movement of these mon-
ies between buyers and sellers, constitute what Keynes called the
"financial circulation" of money. The demand for money to effect
these transactions could then be called the "financial demand for
money."
Just a little thought makes it clear that these two circulations,
industrial and financial, do indeed whirl about the economy.6 It
is equally obvious, and has long been recognized, that these two
flows do not constitute separate, watertight compartments of
money usage.7 Daily funds flow from each of these two circula-
tions into the other. The flow of saving to purchase either newly
issued debt or secondhand tangible and intangible assets feeds fi-
nancial circulation at the expense of industrial circulation. The use
of current income to purchase a 1937 Packard or a used suit of
clothing also feeds financial circulation at the expense of industrial
6 Thus the industrial circulation can be associated with purchases involving

Marshall's short-run flow or forward market transactions, while the financial
circulation, which deals primarily in secondhand purchases of preexisting
items, involves spot (or Marshallian market period) transactions.
7 See, for example, Clark Warburton (1945) and Seymour E. Harris (1933).
circulation. Conversely, the borrowing of funds or the sale of

assets to finance the purchase of final product would drain funds
from financial circulation into industrial circulation. Assuming a
given stock of money, the daily ebb and flow of not necessarily
equal flows between these two circulations could generate a daily
volatility in the supplies of monies available for both industrial
and financial expenditure. The differing velocities of money in
these two circulations and especially the differing volatilities of
these two demands, together with the daily net loss of funds from
one flow to the other, could well impart an added degree of insta-
bility to the economy's overall demand for money. This added ele-
ment of instability would be quite apart from, and in addition to,
those instabilities generated by changes in aggregate liquidity pref-
erence or by changes in the level of industrial or financial activity.
Although the separation of money flows into industrial circu-
lation and financial circulation has meaning for economic analysis,
it may have little meaning for the individual firm or household.
Money is money, and money is used to purchase goods, services,
and secondhand assets. When a man buys a shirt, surely one
thought which is not uppermost in his mind is that he has just
made a purchase on GNP account. He gives no thought to the fact
that his expenditures will most likely keep the wheels of industry
turning, producing more shirts, generating more employment and
more income. When he purchases a rare book rather than an ex-
pensive vacation in Cleveland, Ohio, he may congratulate himself
on his excellent taste. But he most certainly will not be troubled
by the thought that this particular expenditure will not call forth
more production, employment, and income. Individuals and firms
give little if any thought as to which circulation they feed when
they spend a dollar. This means that the aggregate demand for
money is an undivided demand for money to spend; to spend on
all of that which is available for sale.
With the financial structure envisaged here, it follows that the
short-term rate of interest will be determined by the undivided
transactions demand for money and the supply of money. To
sketch briefly the market mechanism which determines this rate,
we shall work within Keynes's liquidity preference time period.
That is, a period of time sufficiently short so that the economy's
stocks of physical capital and intangible assets change only by in-
significant amounts. With this assumed, suppose the short rate of
interest is such that the supply of money exceeds the demand for
money. Here several market adjustments could simultaneously
take place. First, and most easily seen, some numbers of those eco-
nomic units holding excess money balances have funds which are
out on loan from the banking system. Some fraction, perhaps all,
of these loans could be repaid, and the money supplied would
shrink. Other units holding excess balances could purchase money
market funds, bills, or other highly liquid short-term assets. Stocks
and bonds too could be purchased with these balances. The move-
ment of the short rate to its equilibrium value then comes out
through a combination of a decrease in the supply of money and
an increase in the quantity of transactions balances demanded as
bill buying drives the short rate down. The resulting fall in the
short rate would then depend on the amount by which the money
supply shrank and the interest elasticity of the demand for money.
These results necessarily assume that the above adjustments are
not so immoderate as to unsettle the public's confidence in finan-
cial markets or jar seriously their vague, fluctuating, and uncertain
views of the future. But just as important, these adjustments must
not consume so much time that state-of-the-world changes alter
liquidity positions and needs.
The explicit recognition of the fact that money is used to pur-
chase existing assets has brought to light a number of heretofore
unnoticed factors which could serve to destabilize the aggregate
demand for money. Field (1981) has discovered and analyzed well
a number of these now apparent generators of financial volatility.
For example, he found that a simple surge in the demand for
money to finance a higher level of asset exchanges could, in the
absence of a monetary accommodation, draw funds away from in-
dustrial circulation. The resulting increase in the demand for
money would produce higher short-term rates of interest and in-
creased financial stringency in the industrial sector of the econ-
omy. All of this could happen even if the surge in the volumes of
trading was made up of equal numbers of additional bulls and
bears coming to market each day so that longer term asset prices
remained unchanged. Field went on to point out that a monetary
expansion to accommodate a surge in asset exchanges need not
cause instability ". .. provided the money supply and/or financial
velocity contracted along with the tapering off of these asset ex-
change booms" (1981, p. 44). These fluctuations in the demand
for money, he noted, could occur in the absence of any change in

aggregate liquidity preference or in the level of industrial activity.
The question as to whether increased speculative pursuits do in
fact drain funds from productive industrial activity to finance non-
productive assets exchanges was vigorously but inconclusively dis-
cussed in the late 1920s and early 1930s by economists on both
sides of the Atlantic Ocean.8 Since that time this problem has not
been seriously reexamined. This is in spite of the fact that the past
fifty years have seen an enormous growth in both the kinds of
speculative properties being traded and the aggregate dollar mag-
nitudes of these trades. What still is needed today is an analysis of
the extent to which speculation in stocks, bonds, gold, options,
real estate, foreign exchange, and the like represents a nonproduc-
tive use of money and so a misallocation of society's time and ef-
fort.
In the absence of fresh analysis, the best insight we have on this
matter comes from Keynes. Having in mind the Wall Street boom
and crash of some fifty years ago, he wrote
Speculators may do no harm as bubbles on a steady stream of enterprise.

But the position is serious when enterprise becomes the bubble on a
whirlpool of speculation. When the capital development of a country be-
comes a by-product of the activities of a casino, the job is likely to be ill-
done. The measure of success attained by Wall Street, regarded as an in-
stitution of which the proper social purpose is to direct new investment
into the most profitable channels in terms of future yield, cannot be
claimed as one of the outstanding triumphs of laissez-faire capitalism-
which is not surprising, if I am right in thinking that the best brains of
Wall Street have been in fact directed towards a different object.
These tendencies are a scarcely avoidable outcome of our having suc-
cessfully organised "liquid" investment markets. It is usually agreed that
casinos should, in the public interest, be inaccessible and expensive. And
perhaps the same is true of stock exchanges. That the sins of the London
Stock Exchange are less than those of Wall Street may be due, not so
much to differences in national character, as to the fact that to the aver-
age Englishman Throgmorton Street is, compared with Wall Street to the
average American, inaccessible and very expensive. The jobber's "turn,"
the high brokerage charges and the heavy transfer tax payable to the Ex-
chequer, which attend dealings on the London Stock Exchange, suffi-
8See Seymour E. Harris (1933, vol. 2, pp. 596-611) for a detailed review of
this literature.
ciently diminish the liquidity of the market (although the practice of

fortnightly accounts operates the other way) to rule out a large propor-
tion of the transaction characteristic of Wall Street. The introduction of
a substantial government transfer tax on all transactions might prove the
most serviceable reform available, with a view to mitigating the predom-
inance of speculation over enterprise in the United States. (1936, pp.
159-60)
The dilemma Keynes saw was that markets too liquid would per-
mit periods of speculative excesses. Insufficiently liquid markets
for financial securities, on the other hand, might impede the flow
of funds from savers to investors and so disrupt the process of cap-
ital formation.
If we accept the thesis that the short-term rate of interest is de-
termined by the demand and supply of money, what role then do
expectations-Keynes's liquidity preference-play in deter-
mining current asset prices and rates of interest? With a financial
system in which money no longer is held in hoards, expectations
work to determine the spread between the short rate and the bond
rate of interest. The expectation of an increased need for liquidity,
for example, would prompt a sell-off of bonds and stocks in favor
of short-term debt instruments. Long rates would rise and short
rates fall. To further illustrate the concrete workings of those
vague and fluctuating expectations, suppose a good margin of
wealth holders in search of higher returns were to liquidate their
holdings of stocks and bonds in favor of real estate. Property
prices would rise and so lower their expected rates of return, while
stock and bond prices would sag.9 Viewed this way liquidity pref-
erence theory can be seen to be a general theory of asset pricing
under conditions of uncertainty; under conditions where expecta-
tions govern asset exchanges and asset exchanges produce market
prices and rates of return.
That liquidity preference determines not the long rate of inter-
est but the spread between the short and the long rates is neither a
new result nor is it a surprising result. In Keynes's money-bound
model of the General Theory, liquidity preference determined just
this spread. The zero rate of interest on cash balances played the
role of the numeraire of his interest rate structure, with liquidity
preference determining the bond rate in relation to the zero rate
9For a concise analysis of the relation between inflationary expectations,
asset prices, and rates of return, see Paul Davidson (1981).
on money. In the system set forth above, it is the fluctuating short-

term rate of interest which functions as the numeraire. That the
short rate is subject to fluctuations makes it an unsatisfactory nu-
meraire for the same reasons that an unstable money wage rate
provides the economy with an unsatisfactory numeraire for its
cost-price structure.10
But there is much more to liquidity preference than just an ex-
change of some paper assets for other paper assets or tangible
wealth. More than simply shifting out of one class of real assets in-
to another class of real assets or intangible wealth. More too than
the accepted fact that liquidity preference considerations directly
affect the market prices of tangible and intangible assets and so in-
directly affect the level of spending on final product. In addition
to all of this, liquidity needs directly affect the flows of house-
hold and business spending on final product. An increased need
for liquidity could prompt households to cease going further into
debt, into illiquidity. Consumers could reduce their debt-financed
expenditures on housing, automobiles, furniture, and other big-
ticket items. They could further improve their position by reduc-
ing their short-term indebtedness either at the expense of their
current spending on final product or by selling highly liquid short-
term assets. Businesses could promptly improve their liquidity po-
sitions by decreasing their debt-financed purchases of long-lived
capital equipment. The issuance of debt and the purchase of fixed
capital equipment is a deep twice-over plunge into illiquidity.
They could further improve their position by reducing their stocks
of working capital and by reducing their short-term debt. All of
the above changes in spending on final product could occur inde-
pendently of any change in interest rates. Hence, changing liquidity
needs can both directly and indirectly affect the overall performance
of the economy.
Conclusion
This paper has advanced the argument that since there are many
intangible assets which dominate money as a store of value, the de-
mand for idle cash balances is identically equal to zero. Next an
10 Detailed analyses of the economic value of stable numeraires have been

given by Paul Davidson (1978, chaps. 9, 14, and 16), J. M. Keynes (1936,
chaps. 17 and 19), and Sidney Weintraub (1978, part 2 and chap. 9)
obvious but neglected fact concerning money was introduced in

the analysis. The overlooked fact is that money is used to finance
the exchange of existing assets just as it is used to finance the pur-
chase of goods and services on GNP account. Recognizing this sig-
nificant use of money, the transactions demand for money was de-
fined to be a demand for money to finance the totality of all ex-
changes through the economy. The short-term rate of interest was
then determined by the demand and supply of money, with liquid-
ity preference establishing the spread between the short and long
rates of interest. Finally, the case was made that liquidity prefer-
ence considerations not only directly affect financial markets, and
so indirectly affect spending on final product; these considerations
also directly affect consumer and business spending on final
product.
What now needs to be done is to extend the analysis to cover a
longer period of time. A time period in which the economy's
stocks of capital equipment, credit, and net worth grow by signifi-
cant amounts. What is called for here is an analytical joining to-
gether of our liquidity preference-stock theory with a complemen-
tary loanable funds-flow theory. Each of these two theories ex-
plains a different phenomenon; taken together they promise to
form a more powerful explanation of the level and movement of
the interest rate structure than does either theory taken by itself.
Second, this paper does not at all treat the highly important prob-
lem of financing increasing levels of spending on both GNP and
non-GNP account. Keynes (1937b) was the first post Keynesian
economist to investigate this question. Davidson (1965, 1978)
then rescued this aspect of Keynes's work from near oblivion and
gave it its modern formulation. Recently Weintraub (1980) has
added more to our understanding of this problem and has suggested
promising new lines of investigation to be pursued.
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A Post Keynesian View of Liquidity Preference and the Demand for Money

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A Post Keynesian View of Liquidity Preference and the Demand for Money

Author(s): Paul Wells

A post Keynesian view of liquidity

Perhaps to render a particularly clear exposition of his altogether

The author is Professor of Economics, University of Illinois. He wishes to

Journal of Post Keynesian Economics/Summer 1983, VoL V, No. 4 523

is fluctuating, vague, and uncertain . .." (1937a, p. 213, emphasis

G. L. S. Shackle, in support of Keynes, has brought beautifully

... universally relevant truth.... That truth is our essential, incurable

tance of time and uncertainty, of liquidity and liquidity prefer-

In the decades following the publication of the General Theory

4 Those smaller-order precautionary balances which all of us hold "To enjoy a

quidity would be held in the form of short-term interest-bearing

We shall now attempt to develop a more modern and comprehen-

5 Examples of such precautionary balances held for unplanned but doubtless

money to effect this mass of expenditures is closely related to the

6 Thus the industrial circulation can be associated with purchases involving

circulation. Conversely, the borrowing of funds or the sale of

for money, he noted, could occur in the absence of any change in

Speculators may do no harm as bubbles on a steady stream of enterprise.

ciently diminish the liquidity of the market (although the practice of

on money. In the system set forth above, it is the fluctuating short-

10 Detailed analyses of the economic value of stable numeraires have been

obvious but neglected fact concerning money was introduced in

Garner, C. Alan. "Uncertainty and Economic Decisions." Journal of Post Keynesian

Kahn, R. F. "Some Notes on Liquidity Preference," The Manchester School of Eco-

. The General Theory of Employment, Interest and Money. London: Mac-

Shackle, G. L. S. Keynesian Kaleidics. Edinburgh: Edinburgh University Press, 1974.

."Money Supply and Demand Interdependence." Journal of Post Keynesian

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