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What Is The Concept Of Money And Liquidity?

Nowadays many economists prefer to define money in a wider sense. Any definition of money which confines money to currency and demand deposits only is considered by them as too restrictive. They believe that the spending is not limited by the amount of money in the restricted sense, but is related to the amount of assets which possess money liquidity.

According to the Radcliffe Committee, “It is the whole structure of liquidity that is relevant to spending decisions.”

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The affects of liquidity

What is meant by liquidity?

The attribute of liquidity, according to some experts, is Short Maturity.
There are others who lay emphasis on Negotiability.
It is also termed as Moneyness.

The concept of money liquidity which was actually left unexplained by the Radcliffe Committee has since then been expounded by Prof. Sayers of England and Prof. Schomolders of Germany. Stated in simple terms, money liquidity is the ability of an asset to be converted into spendable form without any delay, inconvenience or any risk of loss to its holder. A liquid asset can presumably Flow more readily than other assets through markets and the economic system. This property of liquidity involves some conditions.
First of all, in order to be liquid the asset must be readily marketable or transferable.
Secondly, it must be stable in price. Its value ordinarily fluctuates only very narrowly in terms of money.

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Money in the form of cash and demand deposits is certainly most liquid. But there are some other assets, such as time and savings deposits at commercial banks, post offices and non banking financial institutions, short term Government bills and securities etc. which are very close to money liquidity.
For purposes of storing readily available purchasing power they are important money substitutes. They are generally called, Near Money or Quasi Money to indicate this ready substitutability. The extending to which an asset approaches money in case of convertibility and freedom from risk of capital loss may be referred to as its degree of money liquidity.
All the assets mentioned above have a high degree of money liquidity or moneyness, because all of these are easily convertible into money with only minor delays and at little cost other than the sacrifice of the income that they yield.

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What is money liquidity

Those who favor a broader definition of money argue that these liquid assets or near moneys should also be included in money because their availability can affect the willingness and ability of the public to spend. Prof. L.V. Chandler admits that “the availability of these near moneys can affect the behavior of the rate of money spending”, but he prefers to exclude these assets from money supply and therefore, defines money supply in the restricted sense only. Chandler is prepared to accept the quantities of near money  as
"One, but only one, of the determinants of the community's demand function for money balances” and admits that “the behavior of spending depends not only on the supply (stock) of money liquidity but also on the demand function of community for money balances.

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The concept and definition of liquidity

It is obvious that the total of money supply narrowly defined will include coins, paper currency and demand deposits of commercial banks. But a broader definition of money will also include near moneys in the total money supply because they do have a direct bearing on spending.
The exact definition of money, according to Samuelson, “Is partly a matter of taste rather than scientific necessity.” It is better to adopt a dynamic attitude.

A century ago, demand deposits were not considered as money. Today these are regarded as an important component of the public’s money supply. The near moneys are certainly not as much liquid as money proper. Yet they do indeed possess the characteristics of moneyness or liquidity. If these are taken into account, the monetary authority can formulate a set of controls which provide a regulatory grip on the total money liquidity position in the economy. It is, therefore, sometimes useful to work with a broader definition. In fact, in choosing a particular definition of money there is no basic issue of principle or theoretical validity. The only criterion that may be applied is one of operational convenience and more fundamentally empirical usefulness. This requires us to take a disaggregated view and employ a variety of monetary aggregates depending on endues to which the data are likely to be put.

Reference Book: Money Banking and International Trade.
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Topic Under: 4/13/2017
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