ABSTRACT
One of the great contributions to the advancement of monetary theory made by Keynes in his General Theory of Employment, Interest and Money was his attempt to replace the mechanical treatment of velocity as a technological and institutional constant, characteristic of the ‘classical’ theory he attacked, by a theory of demand for money as an asset alternative to other interest-bearing but less liquid assets. Keynes’s own theory of demand for money, however, was an awkward compromise between the preceding treatment of velocity as a constant, and a fully generalized asset theory of demand for money. For he divided the demand for money into two parts—M 1, the transactions and precautionary demand for money, and M 2, the speculative demand for money—and treated the first part in a conventional fashion as bearing an institutionally-determined proportionality relationship to income, confining the analysis of the demand for money as an asset to the speculative demand for money. It was left to subsequent writers, writing in the 1950’s, 1 to integrate the theory of transactions demand into a generalized capital-theory approach to demand for money, by treating cash demanded as a form of inventory held for the services it yielded, and its quantity as depending on other economic variables and responding to changes in them.
