What is the liquidity of money

Liquidity theory

points in particular to the importance of the liquidity of economic agents. If, for example, investment projects increase when the economy increases, claims are monetized by commercial banks, whose money supply increases as a result. Like banking theory, liquidity theory also sees money as a passive medium that does not itself stimulate any economic activity. Rather, an increasing amount of money presupposes increased economic activity. But it is not only the amount of money that is decisive for the opportunities for turnover in an economy, but also the money substitutes (money surrogates), which, like money, serve as a means of payment. Money substitutes are money orders (checks, travelers checks), payment obligations (bills of exchange) and credit cards, which according to the traditional view are not counted among the types of money. Credit cards are special because they do not actually lead to a payment, but rather to a borrowing; this is offset together with other claims and liabilities, and only in the amount of the balance of all account transactions of an economic entity does it lead to a payment at a clearing house. The liquidity of economic agents, which can be used directly for payments, is made up of both money and money substitutes. For this reason, a circulation speed of liquidity is sometimes formulated for the demand for money, which has the same importance as the speed of circulation of money. The liquidity theory describes the relationship between the monetary and real economic areas of an economy through the liquidity balance concept, the credit availability concept and the concept of the subjective liquidity assessment of individual economic subjects). (1) According to the liquidity balance concept, the relationship between tied liquidity and the total of all liquidity balances (total of current and potential stocks of central bank money, i.e. in principle: minimum reserve deposits of commercial banks including the free liquidity reserves, i.e. the provision of central bank money) decisive for monetary effects. If the liquidity balance rises due to restrictive monetary policy measures, the credit supply tends to decrease as interest rates rise. These rising credit costs lead to a reduction in the demand for credit and thus the credit volume on the credit market. (2) But the credit availability concept with its effect on the credit supply also plays a role. Thereafter, if the supply of credit rises, the interest rate level falls, so that the opportunity costs for alternative investments rise for lenders; instead of granting loans, the potential loan providers will now increase their demand for securities, so that the loan supply will tend to be reduced again. In principle, considerations of portfolio theory also go into this concept. (3) Finally, according to the concept of subjective liquidity, the "feeling of financial freedom of movement" (Günter Schmölders) of economic agents and thus their behavior are influenced by monetary policy measures. The liquidity theory goes back to research results of the Radcliffe report of 1959. Its German founders are Claus Köhler, Günter Schmölders and Wolfgang Stützel. Literature: Committee on the Working of the Monetary System, Report, London 1959. Schmölders, G., From "Quantity Theory" to the "Liquidity Theory" of Money, in: Dürr, E. (Ed.), Monetary and Bank Policy, Cologne , Berlin 1969, p. 77 ff. Deutsche Bundesbank, Central Bank Money and Free Liquidity Reserves of Banks, Monthly Reports, Volume 26 (1974), No. 7, Frankfurt aM, p. 14 ff.

Previous technical term: liquidity status | Next technical term: liquidity theory of the money supply



Report this article to the editors as incorrect and reserve it for editing