CHAPTER 15

The PSYCHOLOGICAL AND BUSINESS INCENTIVES

TO LIQUIDITY

I

We must now develop in more detail the analysis of the motives to liquidity - preference which were introduced in a preliminary way in Chapter 13. The subject is substantially the same as that which has been sometimes discussed under the heading of the Demand for Money. It is also closely connected with what is called the income-velocity of money;for the income­velocity of money merely measures what proportion of their incomes the public chooses to hold in cash, so that an increased income- velocity of money may be a symptom of a decreased liquidity- preference. It is not the same thing, however, since it is in re­spect of his stock of accumulated savings, rather than of his income, that the individual can exercise his choice between liquidity and illiquidity. And, any­how, the termincome- velocity of money” carries with it the misleading suggestion of a presumption in favour of the demand for money as a whole being proportional, or having some determinate relation, to income, whereas this presumption should apply, as we shall see, only to a portion of the public's cash holdings; with the result that it overlooks the part played by the rate of interest.

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

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