The Portfolio Approach to the Demand for Money and Other Assets

Abstract

T HE theory of the demand for financial assets has come in for a good deal of discussion in the last few years. Undoubtedly the discussion has been fruitful and has given us many new insights into the nature of financial processes. But it cannot be said that there is any generally agreed upon view as to the way in which those processes work. It would be appropriate at a conference of this kind to review the different hypotheses and give a systematic summary of the present state of knowledge. Unfortunately, though I have read the literature assiduously I have found it rather indigestible. I do not feel prepared to give a fair summary of other people's views. I must fall back therefore on giving my own. In this paper I shall deal with the demand for liquid assets and money by households and corporations. Those two groups hold over twothirds of all liquid assets, and the same general approach though not the details can probably be applied to the demands of unincorporated businesses, farmers, state and local governments. In dealing with the demand for liquid assets we must at least implicitly deal with the demand for other types of assets, but I shall not, except incidentally, say anything in detail about the demand for stocks, bonds, or physical assets. I shall confine myself to the demand for currency, demand deposits, commercial bank time deposits, mutual savings bank deposits, savings and loan shares, savings bonds, and short-term federal securities. There are, of course, other liquid assets, but I shall have little to say about them. I have occasionally used the term money in the sense of demand deposits and currency but have usually referred to those assets specifically to avoid any confusion with other definitions of money. But though I am happy to try to avoid the semantic confusion involved in arguments about whether any particular asset should be included under the heading money, I do cling to the view that commercial bank time deposits are significantly different from demand deposits. For that matter, so is currency, and so perhaps we ought to dispense with the term money in theoretical discussions and say clearly what we mean. In the first section of the paper I have discussed very briefly the conditions under which liquid assets are supplied. There follow in section 2 a discussion of corporate motives for holding liquid assets and money and a review of some empirical evidence on the relative importance of various factors influencing corporate decisions. In section 3, this theory of household demand for liquid assets and money is discussed together with some empirical evidence.