168 THE GENERAL THEORY OF EMPLOYMENT BK. IV

other factor, which, in conjunction with liquidity-pre-ference, determines the actual rate of interest in givencircumstances. Liquidity-preference is a potentialityor functional tendency, which fixes the quantity ofmoney which the public will hold when the rate ofinterest is given; so that if r is the rate of interest, Mthe quantity of money and L the function of liquidity-preference, we have M = L(r). This is where, andhow, the quantity of money enters into the economicscheme.

At this point, however, let us turn back and con-sider why such a thing as liquidity-preference exists.In this connection we can usefully employ the ancientdistinction between the use of money for the transactionof current business and its use as a store of wealth. Asregards the first of these two uses, it is obvious that upto a point it is worth while to sacrifice a certain amountof interest for the convenience of liquidity. But, giventhat the rate of interest is never negative, why shouldanyone prefer to hold his wealth in a form which yieldslittle or no interest to holding it in a form whichyields interest (assuming, of course, at this stage, thatthe risk of default is the same in respect of a bankbalance as of a bond)? A full explanation is complexand must wait for Chapter 15. There is, however,a necessary condition failing which the existence of aliquidity-preference for money as a means of holdingwealth could not exist.

This necessary condition is the existence of un-certainty as to the future of the rate of interest, i.e. as tothe complex of rates of interest for varying maturitieswhich will rule at future dates. For if the rates ofinterest ruling at all future times could be foreseen withcertainty, all future rates of interest could be inferredfrom the -present rates of interest for debts of differentmaturities, which would be adjusted to the knowledgeof the future rates. For example, if is the value inthe present year 1 of1 deferred r years and it is