CH. 15 INCENTIVES TO LIQUIDITY 197

system. For the demand for money to satisfy theformer motives is generally irresponsive to any influ-ence except the actual occurrence of a change in thegeneral economic activity and the level of incomes;whereas experience indicates that the aggregate demandfor money to satisfy the speculative-motive usuallyshows a continuous response to gradual changes in therate of interest, i.e. there is a continuous curve relatingchanges in the demand for money to satisfy the specu-lative motive and changes in the rate of interest asgiven by changes in the prices of bonds and debts ofvarious maturities.

Indeed, if this were not so, “open market opera-tions” would be impracticable. I have said that experi-ence indicates the continuous relationship stated above,because in normal circumstances the banking systemis in fact always able to purchase (or sell) bonds inexchange for cash by bidding the price of bonds up(or down) in the market by a modest amount; and thelarger the quantity of cash which they seek to create(or cancel) by purchasing (or selling) bonds and debts,the greater must be the fall (or rise) in the rate ofinterest. Where, however, (as in the United States,I 933 -I 934) open-market operations have been limitedto the purchase of very short-dated securities, the effectmay, of course, be mainly confined to the very short-term rate of interest and have but little reaction on themuch more important long-term rates of interest.

In dealing with the speculative-motive it is, how-ever, important to distinguish between the changes inthe rate of interest which are due to changes in thesupply of money available to satisfy the speculative-motive, without there having been any change in theliquidity function, and those which are primarily dueto changes in expectation affecting the liquidityfunction itself. Open-market operations may, indeed,influence the rate of interest through both channels;since they may not only change the volume of