Keynes’s Finance Motive

Abstract

In The General Theory, Keynes distinguishes between three motives for holding cash `(i) the transactions-motive, i.e. the need of cash for the current transaction of personal and business exchanges; (ii) the precautionary-motive, i.e. the desire for security as to the future cash equivalent of a certain proportion of total resources; and (iii) the speculative-motive, i.e. the object of securing profit from knowing better than the market what the future will bring forth' (Keynes, 1936, p. 170). Keynes recognized that `money held for each of these three purposes forms, nevertheless, a single pool, which the holder is under no necessity to segregate into three watertight compartments' (ibid., p. 195); however, he did suggest that these three categories formed an exhaustive set and that all other reasons for holding money (e.g. the income motive or the business motive) are merely subcategories of these three major divisions (ibid., pp. 194--200). According to Keynes, the quantity of money demanded for transactions and precautionary purposes `is not very sensitive to changes in the rate of interest' (ibid., p. 171); rather it `is mainly a resultant of the general activity of the economic system and of the level of money-income' (ibid., p. 196); the quantity of money demanded for speculative purposes, on the other hand, responds to `changes in the rate of interest as given by changes in the prices of bonds and debts of various maturities' (ibid., p. 197).