170 THE GENERAL THEORY OF EMPLOYMENT BK. IV

discussed at some length in connection with the marginalefficiency of capital. Just as we found that the marginalefficiency of capital is fixed, not by the “best” opinion,but by the market valuation as determined by masspsychology, so also expectations as to the future of therate of interest as fixed by mass psychology have theirreactions on liquidity-preference; — but with thisaddition that the individual, who believes that futurerates of interest will be above the rates assumed by themarket, has a reason for keeping actual liquid cash ,1whilst the individual who differs from the market in theother direction will have a motive for borrowing moneyfor short periods in order to purchase debts of longerterm. The market price will be fixed at the point atwhich the sales of the “bears” and the purchases of the“bulls” are balanced.

The three divisions of liquidity-preference which wehave distinguished above may be defined as dependingon (i) the transactions-motive, i.e. the need of cash forthe current transaction of personal and business ex-changes ; (ii) the precautionary-motive, i.e. the desire forsecurity as to the future cash equivalent of a certainproportion of total resources; and (iii) the speculative-motive, i.e. the object of securing profit from knowingbetter than the market what the future will bring forth.As when we were discussing the marginal efficiencyof capital, the question of the desirability of having ahighly organised market for dealing with debts pre-sents us with a dilemma. For, in the absence ofan organised market, liquidity-preference due to theprecautionary - motive would be greatly increased;whereas the existence of an organised market gives an

1 It might be thought that, in the same way, an individual, who believedthat the prospective yield of investments will be below what the market isexpecting, will have a sufficient reason for holding liquid cash. But this isnot the case. He has a sufficient reason for holding cash or debts in preferenceto equities; but the purchase of debts will be a preferable alternative toholding cash, unless he also believes that the future rate of interest will proveto be higher than the market is supposing.