Chapter 6 complete

6.5.1 Radcliffe-Sayers’ version of the Liquidity Theory 
The Radcliffe Committee Report on the Working of the Monetary System (1959) emphasis 
on monetary policy aspects while Sayers emphasis on theoretical aspects of the liquidity 
theory; the combined analysis of liquidity theory of both Radcliffe committee and Sayers are 
sometimes called Radcliffe-Sayers’ thesis. This thesis emphasis that the aggregate demand or 
the level of economic activity is influenced by the public expenditure, which in turn is not 
only influenced by the quantity of money in circulation and demand deposits but also by the 
general liquidity of the economy. The general liquidity is influenced by the interest rate. The 
liquidity theory, thus, accords an important place to the interest rate. It is the interest rate, 
which determines the expenditure of public via general liquidity. Any change in the interest 
rate affects general liquidity. For example, change in interest rate affects lending activities of 
the commercial banks and non-banking financial intermediaries (NBFIs). An increase in the 
interest rate decreases general liquidity, which leads to fall in public expenditure and 
ultimately fall in the price level and vice versa. Thus, to control over the economy, we have 
to control the interest rate and regulate the functioning of non-banking financial 
intermediaries besides commercial banks. In a nut shell, this theory states that quantity of 
money, though play an important role in determining the price level yet it is near money 

---

assets (i.e., general liquidity), which determines the price level. According to this theory, 
monetary policy cannot succeed unless it is supported by fiscal policy.