Liquidity preference

In macroeconomic theory, liquidity preference is the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936) to explain the determination of the interest rate by the supply and demand for money. The liquidity preference theory by Keynes was a refinement of Silvio Gesell's theory that interest is caused by the store of value function of money.^[1]

The demand for money as an asset was theorized to depend on the interest foregone by not holding bonds (here, the term "bonds" can be understood to also represent stocks and other less liquid assets in general, as well as government bonds). Interest rates, he argues, cannot be a reward for saving as such because, if a person hoards his savings in cash, keeping it under his mattress say, he will receive no interest, although he has nevertheless refrained from consuming all his current income. Instead of a reward for saving, interest, in the Keynesian analysis, is a reward for parting with liquidity. According to Keynes, money is the most liquid asset. Liquidity is an attribute to an asset. The more quickly an asset is converted into money the more liquid it is said to be.^[2]

^ Keynes, John Maynard (February 1936). "Book 6, Chapter 23: Notes on Mercantilism, The Usury Laws, Stamped Money and Theories Of Under-Consumption". The General Theory of Employment, Interest and Money. London: Macmillan. ISBN 978-0-230-00476-4. Retrieved 30 April 2025 – via Freie Universität Berlin. It is convenient to mention at this point the strange, unduly neglected prophet Silvio Gesell (1862-1930), whose work contains flashes of deep insight and who only just failed to reach down to the essence of the matter. In the post-war years his devotees bombarded me with copies of his works; yet, owing to certain palpable defects in the argument, I entirely failed to discover their merit. As is often the case with imperfectly analysed intuitions, their significance only became apparent after I had reached my own conclusions in my own way. {{cite book}}: ISBN / Date incompatibility (help)
^ Macroeconomic Theory, Joydeb sarkhel

[keynes-on-gesell-1] Keynes, John Maynard (February 1936). "Book 6, Chapter 23: Notes on Mercantilism, The Usury Laws, Stamped Money and Theories Of Under-Consumption". The General Theory of Employment, Interest and Money. London: Macmillan. ISBN 978-0-230-00476-4. Retrieved 30 April 2025 – via Freie Universität Berlin. It is convenient to mention at this point the strange, unduly neglected prophet Silvio Gesell (1862-1930), whose work contains flashes of deep insight and who only just failed to reach down to the essence of the matter. In the post-war years his devotees bombarded me with copies of his works; yet, owing to certain palpable defects in the argument, I entirely failed to discover their merit. As is often the case with imperfectly analysed intuitions, their significance only became apparent after I had reached my own conclusions in my own way. {{cite book}}: ISBN / Date incompatibility (help)

[2] Macroeconomic Theory, Joydeb sarkhel

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