1 66 THE GENERAL THEORY OF EMPLOYMENT bk. iv

What, then, is our own answer to this question?ii

The psychological time-preferences of an individualrequire two distinct sets of decisions to carry them outcompletely. The first is concerned with that aspect oftime-preference which I have called the propensity toconsume , which, operating under the influence of thevarious motives set forth in Book III., determinesfor each individual how much of his income he willconsume and how much he will reserve in some form ofcommand over future consumption.

But this decision having been made, there is afurther decision which awaits him, namely, in whatform he will hold the command over future con-sumption which he has reserved, whether out of hiscurrent income or from previous savings. Does hewant to hold it in the form of immediate, liquid com-mand (i.e. in money or its equivalent)? Or is heprepared to part with immediate command for aspecified or indefinite period, leaving it to future marketconditions to determine on what terms he can, ifnecessary, convert deferred command over specificgoods into immediate command over goods in general?In other words, what is the degree of his liquidity-preference —where an individual’s liquidity-preferenceis given by a schedule of the amounts of his resources,valued in terms of money or of wage-units, which hewill wish to retain in the form of money in differentsets of circumstances?

We shall find that the mistake in the acceptedtheories of the rate of interest lies in their attemptingto derive the rate of interest from the first of thesetwo constituents of psychological time-preference to theneglect of the second; and it is this neglect which wemust endeavour to repair.

It should be obvious that the rate of interest cannot