The new reality: hoarding or avoiding using cash because of Covid- 19 and the relevance of Quantitative Easing

May 02 22:05 2020 Print This Article

Keynes wrote at length about the increased attachment to cash which he called increased liquidity preference in a time of crisis which leads to a rise in the rate of interest as there are limits to the amount of cash in circulation. Keynes puts it as follows in his Quarterly Journal of Economics article in Feb. 1937, The General Theory of Employment. He writes:

When, as happens in a crisis, liquidity preferences are sharply raised, this shows itself not so much in increased hoards-for there is little if any more cash which is hoardable than there was before-as in a sharp rise in the rate of interest, i.e.securities fall in price until those ,who would now like to get liquid if they could do so at the previous price, are persuaded to give up the idea as being no longer practicable on reasonable terms.A rise in the rate of interest is a means alternative to an increase of hoards for satisfying an increased liquidity preference.Nor is my argument affected by the admitted fact that different types of assets satisfy the desire for liquidity in different degrees.The mischief is done when the rate of interest corresponding to the degree of liquidity of a given asset leads to a market capitalisation of that asset which is less than  its cost of production ( JMK, The General Theory and After,Part II Defense and Development.  Collected Works p.111.

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About Article Author

Harold Chorney Economist

Harold Chorney is a Professor of political economy at Concordia university in Montréal, Québec. He worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. He also worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. He's been sought after for consultation by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. His work on public sector deficits was discussed by members of the Government of France under the Presidency of Francois Mitterand.

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