Each function was linked to motives for holding money. The complex arrangement is sketched in Figure 1-10. As indicated by moving down the first of the four columns, money is defined as a medium of exchange, a standard of value (i.e., simply the unit of account), and a store of value. This last function of money made the crucial difference, as it encompassed the speculative and precautionary demands for money. Although Keynes had dealt with the speculative demand for money in relation to price- level changes in 1923, in his most famous work the speculative demand for money was confined to speculation in bonds and the choice between holding money balances and bonds.
As Milton Friedman adopted the definition of money stated here, he did a number of additional things: (1) he went back to Keynes's treatment of the demand for money in 1923, where Keynes had first started dealing with speculative demand in relation to price level changes and the Cambridge equation M = k(. . .) Y; (2) he related the Cambridge equation to the liquidity preference construction; (3) he broadened the classes of assets held to four; and (4) he related all of this to his special use of time frames, which is pointed to later in the chapter. In doing all of these things, expectations about bond prices and inflation (or deflation) were no longer constant for policy execution purposes. Motion was added to the analysis. Thus across the lower part of Figure 1-10 are the store of values function of money extended to the two classes of speculation, and to the speculative and precautionary motives for holding money, which J. M. Keynes first introduced into economics.
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Publication information: Book title: The Central Banks:The International and European Directions. Contributors: William Frazer - Author. Publisher: Praeger. Place of publication: Westport, CT. Publication year: 1994. Page number: 32.
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