In this section, the author begins describing special cases of analysis to help address the general question of how an individual will distribute his funds between money and securities.
The first and simplest case is defined so that the individual involved will have a demand for money that is "nil." Or, put another way, the individual will choose to hold all of his funds in the form of securities instead of money.
Suppose that the interest on the securities he possesses at the planning date, together with any other kinds of revenue which may be due him, is expected to yield a constant flow of receipts, the same amount in every future week. Suppose, further, that he plans to spend, in every future week, the same amount as he receives, no more and no less. Then, if he is perfectly confident that he can carry out his plan, his demand for money will be nil. All the money he receives will be paid out again at once; he will need to keep over from one week to another no money balance at all to finance his transactions.
The author goes on to discuss two reasons why this example is unrealistic.
The first is that expenditures and receipts "do not come in at exactly the same moments." Thus some money balance would typically be held because trying to invest it in securities is not worth the trouble. The author argues that these effects, from the standpoint of the economy as a whole, probably cause the holding of "a fairly constant amount of money, only liable to some quite regular fluctuations at quarter-days and Christmas and so on." Moreover, he indicates that this source of demand for money is not much affected by interest rate changes.
The second reason why money is held is that even if expenditures and receipts tended to coincide, there is always uncertainty to be guarded against. Because the costs associated with selling securities on the spur of the moment could be considerable, "the mere risk of needing to do this would be sufficient to offset a moderate gain in interest." The degree to which an individual will choose to hold money for this reason will depend on "the individual's attitude to the risk and upon the size of the gain offered by investment in securities." Therefore this effect is sensitive to interest rates, "but it is also very susceptible to changes in the risk factor."
An important example of a business needing to hold money for the purpose of paying claims on short notice is that of banks. The author calls this "the clearest case" of a business incurring liabilities that it may be called on "to meet at dates which cannot be quite certainly predicted." But, as he notes in closing this section, "the holding of money against uncertain future expenditures ... is practiced to some extent by all businesses, and by many private individuals as well."
No comments:
Post a Comment