Main Motives for which Money is Wanted by the People

Some of the major motives for which money is wanted by the people are as follows: (a) Transaction Motive (b) Precautionary Motive (c) Speculative Motive.

People demand commodities such as rice, wheat, clothes, etc. because these goods possess utility. However, money does not possess any utility to directly satisfy the consumers. Then, why do people demand money?

Broadly stating, there are three main motives, for which money is wanted by the people:


(a) Transaction Motive;

(b) Precautionary Motive;

(c) Speculative Motive.

(a) Transaction Motive:

It refers to demand for money for conducting day-to-day transactions. This motive can be looked at from the perspective of consumers, who want income to meet their household expenditure (income motive) and from the perspective of businessmen, who require money to carry on their business activities (business motive).


The transaction motive relates to demand for money to meet the current transactions of individuals and business units. The income, which a person gets, is not continuous whereas, expenditure is continuous. So, to bridge the gap between receipt of income and its expenditure, people hold cash.

According to Keynes, transaction demand for money is positively associated with the level of income, i.e. higher the level of income, larger would be the size of money holdings for transactions.

(b) Precautionary Motive:

It refers to the desire of people to hold cash balances for unforeseen contingencies. People wish to hold some money to provide for the risk of unforeseen events like sickness, accident, etc. The amount of money held under this motive, depends on the nature of individual and on the conditions in which he lives. The demand of money for precautionary balances is also closely related to the level of income. Higher the level of income, more will be the cash balances for contingencies.

Transaction Motive Vs. Precautionary Motive:


1. In case of transaction motive, money is held for ordinary transactions, while under precautionary motive, cash is kept to meet unforeseen transactions.

2. Under transaction motive, holding of money is very convenient and value of money, in terms of other goods, is relatively certain. However, under precautionary motive, holding of money depends on the degree of uncertainty i.e. more money is kept in the events of war or financial crisis and less money during normal conditions.

In general, the cash balances held for transaction and precautionary motives are directly dependent on the level of income.

(c) Speculative Motive:

It refers to desire of the holder to keep cash balance as an alternative to financial assets like bonds. Under speculative motive, it is presumed that people can hold their wealth either in the form of bonds or in the form of cash balances. The decisions regarding holding of bonds or cash balances depend upon the expectations about changes in the rate of interest or capital value of assets (bonds) in future.


The interest rate varies inversely with the market value of securities (bonds), i.e. when interest rate rises, market value of bonds falls. Hence, demand for money for speculative motive becomes less at high interest rates and becomes large at low interest rates.

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