Liquidity preference

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John Maynard Keynes developed the Liquidity Preference of Interest in the General Theory of Employment Interest and Money. The primary consideration of the liquidity preference is the demand for money as an asset, as a means for holding wealth. Interest rates, he argues, cannot be a reward for savings as such because, if a person hoards his savings in cash, he will receive no interest, although he has nevertheless, refrained from consuming all his current income. Instead of a reward for savings, interest in the Keynesian analysis is a reward for parting with liquidity.

Here is a diagram and discussion to illustrate the idea. Liquidity Preference Curve (courtesy of Drexel University).

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