Abstract
That portion of the money supply which is being used to satisfy the needs for a medium of exchange as determined by households’ desire to use money to buy producible goods and entrepreneurs’ desires to use money to buy services of the factors of production will consist of ‘active’ bank deposits. The use of these active balances was termed the industrial circulation by Keynes in his Treatise on Money, as opposed to the use of the portion of the money supply which is involved in the business of distributing titles or stores of wealth, the financial circulation. The industrial circulation as developed in the last chapter, depends primarily on the length of the contractual payments period, the aggregate planned demand for producible goods, the money rates of remuneration of the factors of production employed, and the degree of industrial integration. In this chapter we shall discuss the determinants of the quantities of money demanded for the financial circulation where by finance
we mean the business of holding and exchanging existing titles to wealth … including Stock Exchange and Money Market transactions, speculation and the process of conveying current savings and [windfall] profits into the hands of entrepreneurs.1
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Notes
M. Friedman and A. J. Schwartz, ‘Money and Business Cycles’, Review of Economic Statistics (1963), supplement 45, pp. 59–62. A high elasticity of substitution between money and producible durables is central to the Monetarist position. If the Monetary Authority engages in open market operations, then, according to Friedman, wealth-holders find the composition of their portfolios laden with money as they sell securities for capital gains. These wealth-holders will, according to Friedman, alter the composition of their portfolios and purchase other assets including producible consumer durables and capital goods, thereby creating a demand for resources in the current period. Since in Friedman’s analytical scheme, capital gains via open-market operations could not be viewed as part of the household’s permanent income, it cannot be the size of the capital gain which induces additional consumption demand for durables. Rather it must be that households prefer consumer durables to additional money holdings as a store of value! Of course, unless there is a well organised spot market in consumer durables, the cost of moving, sometime in the future, from command of these specific consumer goods to immediate command of goods in general will be prohibitive. Thus, the Monetarist position must implicitly assume well organised, continuous spot markets in all second-hand durables. (This will be discussed in further detail in Chapter 9.)
J. Tobin, ‘Liquidity Preference as a Behavior Towards Risk’, Review of Economic Studies (1958). Also see H. M. Markowitz, Portfolio Selection, Efficient Diversification of Investments (New York: Wiley, 1959). The quadratic utility function is not necessary for portfolio theory. Nevertheless if one uses the standard deviation as a measure of risk, it implies either a quadratic utility function or a normal probability distribution of all possible outcomes or both. Actuarial certainty may not be explicitly postulated by the theory but it must be assumed if risk is to be measured operationally.
F. H. Knight, Risk and Uncertainty, 1937 reprint ed., p. 231.
See W. Fellner, Profits and Probability (Homewood: Irwin, 1965) p. 3.
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© 1978 Paul Davidson
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Davidson, P. (1978). The Demand for Money as a Store of Value. In: Money and the Real World. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-15865-2_8
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DOI: https://doi.org/10.1007/978-1-349-15865-2_8
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