In macroeconomic theory, liquidity preference is the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936) to explain the determination of the interest rate by the supply and demand for money.The liquidity preference theory by Keynes was a refinement of Silvio Gesell's theory that interest is caused by the store of value function of money.
The demand for money as an asset was theorized to depend on the interest foregone by not holding bonds (here, the term "bonds" can be understood to also represent stocks and other less liquid assets in general, as well as government bonds). Interest rates, he argues, cannot be a reward for saving as such because, if a person hoards his savings in cash, keeping it under his mattress say, he will receive no interest, although he has nevertheless refrained from consuming all his current income. Instead of a reward for saving, interest, in the Keynesian analysis, is a reward for parting with liquidity. According to Keynes, money is the most liquid asset. Liquidity is a potentially valuable attribute of an asset, in circumstances requiring cash money to meet obligations or contingencies. The more quickly an asset can be converted into cash money at or near the present value of its expected long-term cash flow, the more liquid it is said to be.
