CHAPTER 15

The PSYCHOLOGICAL AND BUSINESS INCENTIVES

TO LIQUIDITY

I

We must now develop in more detail the analysisof the motives to liquidity- preference which wereintroduced in a preliminary way in Chapter 13. Thesubject is substantially the same as that which has beensometimes discussed under the heading of the Demandfor Money. It is also closely connected with what iscalled the income-velocity of money;—for the income-velocity of money merely measures what proportion oftheir incomes the public chooses to hold in cash, sothat an increased income- velocity of money may bea symptom of a decreased liquidity- preference. Itis not the same thing, however, since it is in re-spect of his stock of accumulated savings, ratherthan of his income, that the individual can exercisehis choice between liquidity and illiquidity. And, any-how, the term“income- velocity of money” carrieswith it the misleading suggestion of a presumption infavour of the demand for money as a whole beingproportional, or having some determinate relation, toincome, whereas this presumption should apply, as weshall see, only to a portion of the public's cash holdings;with the result that it overlooks the part played by therate of interest.

In my Treatise on Money I studied the total demandfor money under the headings of income- deposits,

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