GENTLEMEN PREFER LIQUIDITY: EVIDENCE FROM KEYNES

Abstract

This paper deals with the concept of liquidity in Keynes’ theoretical and political writings. First of all, liquidity, according to Keynes, is a concept much more comprehensive than commonly held nowadays: for Keynes, liquidity means more than an easy convertibility, a high marketability (land might have been highly liquid in ancient times). In short, an asset is highly liquid when its value is weakly dependent on a change in our long-term state of expectations. In a second step, this reassessment of liquidity is applied to Keynes’ political writings, in particular to monetary policy and also to the ‘buffer-stock’ scheme. On the one hand, our investigation shows that in a context of ‘uncertainty,’ monetary policy basically aims to encourage the private sector to have confidence in long-term expectations. Private wealth owners should accordingly ask for lower and lower ‘liquidity premium.’ On the other hand, Keynes’ ‘buffer stocks’ of commodities are not intended for a direct control of prices. Rather, their proper purpose is to confer more liquidity to commodities; i.e., to transform them to ‘monetary assets.’ All in all, monetary policy and buffer-stocks schemes prove to be two basic rationales of Keynes’ concept of liquidity still worth being investigated—today as before.