Motives For Holding Money

Reader Impact Factor Score
[Total: 17 Average: 4.6]

Published on International Journal of Economics & Business
ISSN: 2717-3151, Volume 1, Issue 2, page 62 – 74
Publication Date: 21 December 2018

Umar Lawal Aliyu
Faculty of Management, Department of Business Administration
LIGS University Hawaii, USA

Journal full text PDF: Motives For Holding Money.

Abstract
The focus of the paper shall be on the motive of holding money. Money is “Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations.” The demand for money arises from two important functions of money. The first is that money acts as a medium of exchange and the second is that it is a store of value. Thus, individuals and businesses wish to hold money partly in cash and partly in the form of assets. Economists hold different views concerning the velocity of money. Classical economists believe velocity is constant; monetarists believe it is not constant but stable and predictable; and Keynesians believe it is neither constant, stable, nor predictable. Economists’ views on velocity affect their policy prescriptions. These show up in their theories of demand for money or why money is demanded. The classical economists did not explicitly formulate demand for money theory but their views are inherent in the quantity theory of money. Classical economists believe velocity is constant; monetarists believe it is not constant but stable and predictable; and Keynesians believe it is neither constant, stable, nor predictable. Economists’ views on velocity affect their policy prescriptions. These show up in their theories of demand for money. While the Keynesians believe that there are three motives for demanding (holding) money: the transactions motive, the precautionary motive, and the speculative motive. The speculative demand for money is inversely related to the interest rate. A fall in the interest rate increases the quantity demanded of money. The thesis will critically analyse and highlight the motives of holding money.

Keywords: Demand, Interest Rate, Money, Precautionary Motive, Speculative Motive, Transactional Motive.

1. Introduction
F A Walker says “Money is what Money does.” D H Robertson sees it as “Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations” Professor crowther “Anything that is generally acceptable as a means of exchange and at the same time, acts as a measure and a store of value.” However, the most universally accepted definition is Money is anything that is generally accepted by a community and is used as a store of value, medium of exchange and used for making payments and discharging obligations.
Why do people hold money with them? Money is the most liquid of all assets. It has universal acceptability and it can be use0d for all different types of transactions. Therefore, people hold money with them. There is also an opportunity cost of holding money; Opportunity cost is the interest that would have accrued from the money held and this opportunity cost is the interest foregone on the amount kept as cash. Therefore, while keeping cash, people consider the advantage s of liquidity and the disadvantage of interest foregone. Demand for money is called liquidity preference and Liquidity preference arises from several motives. Generally it can be classified into three; Transaction Motive, Speculative Motive and Precautionary Motive for holding money.
The desire of a person to hold money is called Demand for Money. The demand for money arises from two important functions of money. The first is that money acts as a medium of exchange and the second is that it is a store of value. Thus, individuals and businesses wish to hold money partly in cash and partly in the form of assets. What explains changes in the demand for money? There are two views on this issue. The first is the “scale” view, which is related to the impact of the income or wealth level upon the demand for money. The demand for money is directly related to the income level. The higher the income level, the greater will be the demand for money. Classical economists believed that the demand for money is strictly a transactions demand, that is, a demand arising from the need to carry out transactions. They assume that since output is constant at full employment and velocity is constant, then the transactions demand for money depends on the price level. Monetarists accept the variability of velocity but believe that MV = PQ can still be a good tool for analysis because even though velocity is variable, it is predictable ……….

2. Literature Review
2.1 Demand For Money
The demand for money arises from two important functions of money. The first is that money acts as a medium of exchange and the second is that it is a store of value. Thus, individuals and businesses wish to hold money partly in cash and partly in the form of assets. Demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits rather than investments. It can refer to the demand for money narrowly defined as M1 (directly spendable holdings), or for money in the broader sense of M2 or M3.
People demand commodities such as rice, wheat, clothes, etc. because these goods possess utility. However, money does not possess any utility to directly satisfy the consumers. Then, why do people demand money? What explains changes in the demand for money? There are two views on this issue. The first is the “scale” view, which is related to the impact of the income or wealth level upon the demand for money. The demand for money is directly related to the income level. The higher the income level, the greater will be the demand for money. Interest-bearing assets dominate money in the sense of M1 as a store of value (even if it is a temporary one).
The second is the “substitution” view which is related to relative attractiveness of assets that can be substituted for money. According to this view, when alternative assets like bonds become unattractive due to fall in interest rates, people prefer to keep their assets in cash, and the demand for money increases, and vice versa ………