In June 1962, John Hicks devoted his Royal Economic Society Presidential Address to the concept of ‘liquidity’. Whereas many terms of economics were drawn from practical commercial life, he believed ‘liquidity’ was a rare example of traffic in the other direction. A piece of theoretical jargon had passed into the wider world, and in such situations economists had ‘some responsibility for these animals, when they are inclined to get loose’. He suggested that Keynes was responsible for coining the term, in its economic sense, in the Treatise on Money. Hicks also pinpointed a passage in the 1931 Macmillan Report where the voice suddenly shifts and ‘liquidity and its congeners (liquid resources, liquid assets) begin to flow all over the vocabulary’. Undoubtedly this was Keynes’s contribution, Hicks concluded, connecting it to passages in the Treatise published the previous year.
After the Treatise and the Macmillan Report, he suggested, ‘liquidity’ the noun and ‘liquid’—as an adjective applied to assets and institutions—quickly entered into the language of commercial life. It also entered the lexicon of economics. In the latter sphere, however, its meaning was later overwritten by Keynes’s more systematic use in the General Theory. A linguistic divergence developed:
For Liquidity escaped to the outside world, not through the General Theory, but through the Macmillan Report and hence through the Treatise; some of the slipperiness which belongs to that period it carried with it. Now (since Radcliffe*) that is a situation with which we economists can no longer refuse to reckon. And perhaps it will do us no harm to open our minds to some of the nuances which the strong music of the General Theory for a while almost blotted out.* ‘Radcliffe’ being the 1959 Report of the UK Radcliffe Committee on the Workings of the Monetary System, on which, much more anon.
According to Hicks, Keynes had launched ‘liquidity’ on two careers, and both were thriving. There was the ‘liquidity’ of the General Theory—the economists’ ‘liquidity’—clearly defined in terms of the schedule of demand for money. Then there was the ‘liquidity’ of the Treatise—the ‘liquidity’ of bankers and central bankers—with multiple meanings, all hard to pin down. Nebulous it may be, but it captured important features of monetary relations that were not represented by the theory of liquidity preference as a schedule of demand for a given stock of money. Addressing economists, Hicks made the case for the other senses of ‘liquidity’ and attempted to clarify them.
This is a pivotal paper, and I’ll return to it several times—especially to flesh out the idea of ‘liquidity’s two careers’ around mid-century. Hicks is going to be one of the heroes of this story, and this paper his own turning point. But for now, I just want to note that he was wrong to credit Keynes with coining ‘liquidity’. Nothing to get too cocky about; he just didn’t have Google Scholar. He might have been tipped off, though, by the Macmillan Report itself. ‘Liquidity’ and especially ‘liquid’ do appear many times in the 1931 Macmillan Report—a clear sign, in Hicks’s view, of passages authored by Keynes. But there is no sense in the report that these were words readers would be unfamiliar with. They are used—without explicit definitions—to refer to properties of both assets and of banks. In fact the words show up in the quoted testimony of a banker, Mr Hyde of the Midland Bank, who described the business of banking as distributing ‘our assets over a variety of different forms of employment so as to secure two objects, first of all liquidity, and, secondly, profits.’
The ‘notable passage’ Hicks singles out as one where ‘liquidity and its congeners… begin to flow all over the vocabulary’ (‘liquid’ appears 17 times in two pages) discusses the international assets of the the Bank of England—something of an outlier, since most uses elsewhere discuss the liquidity of assets and institutions in the domestic financial system. There are passages which are more clearly of Keynesian origin, such as a discussion of bank accommodation of the public’s ‘increased relative preference for liquid assets’. But nowhere is there any indication that a novel term is being introduced.
Because it wasn’t. By 1930 ‘liquid’ and ‘liquidity’ were common terms in the literature on banking. They appear many times in many texts of the 1920s—books for the banker like the American Banking Institute’s (1922) Elementary Banking and O. Howard Wolfe’s (1924) Practical Banking, and books for students and scholars, like Harold G. Moulton’s (1921) The Financial Organisation of Society and Robert G. Rodkey’s (1928) The Banking Process. The origins of ‘liquidity’ go much further back.
Hicks was on to something in recognising that the ‘liquidity’ of ‘liquidity preference’ in the General Theory was hard to square with the ‘liquidity’ of the Treatise. He was just wrong that Keynes introduced ‘liquidity’ in the Treatise. Rather than introducing a term of economics into ‘commercial life’, it was the other way around: Keynes brought a term already current among bankers into theory. He adopted an existing meaning in 1930—and perhaps put it is a particularly clear form. Later, with ‘liquidity preference’, he brought the term from one conceptual realm to another: from the world of banking to ‘high’ economic theory. He joined ‘liquidity’ to the Cambridge tradition of demand-for-money functions. That was the novelty.
The jump from one context to another was fruitful, bringing ‘liquidity’ out from hiding in technical questions of bank balance sheet management to a central role in the dynamics of the capitalist economic system as a whole. Hicks’s unfamiliarity with the term is testament to the intellectual distance between high economics and the applied economics of banking—on which, more to come.
In any case, in travelling between discourses ‘liquidity’ left much conceptual residue behind. The old ‘liquidity’ would continue to be developed among the financial specialists, even as ‘liquidity preference’ as ‘demand for money’ became the province of macroeconomics. The two liquidities would run into each other again, because the special problems of the banking system would again (and again) impinge upon the economic system as a whole, even if macroeconomics, the conceptual system, abstracted from banking. Hicks’s 1962 paper registers one of these encounters, and we’ll come back to it.
First published at Owl of Athena