According to John Maynard Keynes, there are three reasons or motives for holding money.
These are transaction motive, precautionary motive, and speculative motive.
1. Transaction motive: This is one of the primary reasons why people hold money.
The transaction demand is the demand for money for everyday expenses.
It is the desire to hold money to facilitate day-to-day transactions and cover everyday expenses.
Transaction motive for money means people hold cash to pay their day-to-day bills.
It is the demand for money to buy things, pay for goods and services, and to pay for any other daily expenses.
The transaction demand for money is driven by the need for individuals and businesses to meet their day-to-day financial obligations, such as paying for food, rent, utilities, transportation, and other day-to-day transactions.
It is important to note that the transaction motive for holding money is directly related to the level of income.
As people's income increases, their transaction demand for money also increases and vice versa.
2. Precautionary motive: This is the demand for money to pay unpredictable expenses.
It refers to the amount of money that people hold to protect themselves against unexpected events or expenses.
It is the amount that money that individuals and business holds as a precautionary measure to cover unforseen expenses or emergencies.
Precautionary demand for money arises due to uncertainty about future events that could require cash payments.
People hold money to cover unexpected or unforseen eventuality such as illness, accident and car breaking that may arise.
In essence, precautionary demand for money means to hold cash in case of emergencies.
For instance, if someone faces a medical emergency, they might require cash to cover the expenses.
Similarly, unexpected car repairs or home repairs may require immediate cash payments.
The amount of money people hold for precautionary purposes depends on the income level.
If income level rises, precautionary demand for money will also increase.
3. Speculative motive: This is the demand for money to take advantage of expected changes in non-money financial assets.
It refers to the amount of money that individuals or firms hold with the intention of investing it in non-money financial assets that they believe will increase in value over time.
Speculative demand for money is the demand for money to take advantage of unexpected opportunities.
It arises due to the expectation of future changes in the value of these assets.
Speculative motive of money is often associated with holding liquid assets, such as cash or bank deposits, which can be easily converted into other assets, such as stocks or bonds, when opportunities arise.
For example, if an individual expects the price of stocks to increase in the near future, he may hold cash or liquid assets to be able to buy stocks when the price is low..
It is important to note that speculative motive for holding money is inversely related to interest rate.
That is, the speculative demand for money increases as interest rate falls and decreases as interest rate rises.