The General Theory of Employment, Interest, and Money

M
1
, and the amount held to satisfy the speculative-
motive be 
M
2
. Corresponding to these two compartments of cash, we then have two liquidity 
functions 
L
1
and 
L
2
. 
L
1
mainly depends on the level of income, whilst 
L
2
mainly depends on the 
relation between the current rate of interest and the state of expectation. Thus 
M
=
M
1
+ 
 M
2
=
L
1
(
 Y
) + 
L
2
(
r
), 

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where 
L
1
is the liquidity function corresponding to an income 
Y
, which determines 
M
1
, and 
L
2
is the 
liquidity function of the rate of interest 
r
, which determines 
M
2
. It follows that there are three 
matters to investigate: (i) the relation of changes in 
M
to 
Y
and 
r
, (ii) what determines the shape of 
L
1
, (iii) what determines the shape of 
L
2
. 
(i) The relation of changes in 
M
to 
Y
and 
r
depends, in the first instance, on the way in which 
changes in 
M
come about. Suppose that 
M
consists of gold coins and that changes in 
M
can only 
result from increased returns to the activities of gold-miners who belong to the economic system 
under examination. In this case changes in 
M
are, in the first instance, directly associated with 
changes in 
Y
, since the new gold accrues as someone's income. Exactly the same conditions hold if 
changes in 
M
are due to the government printing money wherewith to meet its current 
expenditure;—in this case also the new money accrues as someone's income. The new level of 
income, however, will not continue sufficiently high for the requirements of 
M
1
to absorb the whole 
of the increase in 
M
; and some portion of the money will seek an outlet in buying securities or other 
assets until 
r
has fallen so as to bring about an increase in the magnitude of 
M
2
and at the same time 
to stimulate a rise in 
Y
to such an extent that the new money is absorbed either in 
M
2
or in the 
M
1
which corresponds to the rise in 
Y
caused by the fall in 
r
. Thus at one remove this case comes to the 
same thing as the alternative case, where the new money can only be issued in the first instance by a 
relaxation of the conditions of credit by the banking system, so as to induce someone to sell the 
banks a debt or a bond in exchange for the new cash. 
It will, therefore, be safe for us to take the latter case as typical. A change in 
M
can be assumed to 
operate by changing 
r
, and a change in 
r
will lead to a new equilibrium partly by changing 
M
2
and