‘Demand for money’ concept explained

The word ‘money’ or cash is usually used by common man for currency notes and coins. Apart from above said portable money (cash), we also use cheques demand drafts, debit cards and credit cards as money equivalents. In a broader interpretation, money means not only notes and coins in circulation; it includes other monetary assets like demand & time deposits of banks, post office deposits and other related instruments which can be converted into cash within a short period.

In monetary economics, the term ‘demand for money’ is the relationship between the quantity of money people want to hold and the motivations that determine that quantity. This explains the motive behind the desired holding of financial assets in the form of holding money balance by individuals and business. The decision how much money one should hold is individual’s choice about how to hold their wealth? How much wealth shall be held as money, other than investments? How much wealth shall be held as other assets?  The major motive behind investments in other assets is earning more from that asset by way of income or appreciation.

John Maynard Keynes viewed that money is demanded due to three main motives viz. Transaction Motive, Precautionary motive, and Speculative Motive.

The important motivations for holding money balances must be for purchase of goods and services. That is people hold money for their everyday transactions such as buying groceries, fruits and vegetables, travelling expenses, medical expenses, paying the rent, or it may be kept on hand for other contingencies. People holding money for transaction purpose may change due to technological changes like debit cards, credit cards etc.

People holding money as a precautionary measure may also reduce if credit is easily available to them as individual feel that they can borrow in case of short-term difficulties.

People holding money for speculative motive is to take advantage of future changes in the interest rate or bond prices. In his liquid preference theory, Keynes claims that the higher the rate of interest, the lower the speculative demand for money. And lower the rate of interest, the higher the speculative demand for money.

The boom and bust cycle is a process of economic expansion and contraction that occurs repeatedly in capitalist economy. During the boom the economy grows, and the market brings high returns to investors. In these boom periods, demand for assets will rise and demand for holding money will fall.