Interest in the short-run behavior of the demand for money has been stimulated in recent years notably by the studies of Professors Baumol, Tobin, and Friedman.1 Three issues which have been reopened by their studies will be discussed here. First, what factors influence the demand for money and changes in cash balances over short periods of time? Second, what is the role of interest rates in these short-term changes? Third, are there economies of scale in the holding of money balances? These questions are of some relevance for monetary theory and for discussions of the impact and utility of discretionary monetary policy.

PROFESSOR EISNER'S attempt to revive the liquidity takes the form of five objections to the findings reported by Bronfenbrenner and Mayer.2 In this note I will direct my discussion to the question of evidence for the trap and comment only briefly on other points which Eisner raises. The main burden of my argument is that evidence for or against the liquidity must rest on a demand function for money which explains more than the period surrounding the supposed trap. The post-1 920 data alone are inadequate to support (or reject) the hypothesis. For it has long been known that long-term bond yields peaked in the U.S. in 1920-21 and thereafter declined. A similar movement is shown by velocity. At issue are two questions: (1) whether the data for the 1930's and 1940's show a movement of two variables which are related or a co-movement of two variables each of which declined for any one of a number of other reasons,3 and (2) if the variables are related, do they show evidence of a trap?

THEORIES of monetary and financial markets are generally concerned with the behavior of broad aggregates. As yet, economists have not successfully blended the rich variety of institutional details that make up the financial markets with the theory of relative prices. Perhaps as a result of our procedures and the state of knowledge, our policy recommendations are often suggestions for pervasive changes in institutional arrangements. Many of our perennial policy debates are concerned with issues such as whether or not the Federal Reserve should be replaced by an immutable rule or whether banks should be prevented from independently creating money

THE CONJECTURE that "credit rationing" plays an important role in decisions to purchase or consume recurs frequently in discussions of monetary policy, banking markets and consumption or investment decisions. Repetition of the phrase "cost and availability of credit" in official statements strengthens the impression that cost and "availability" have separable and independent effects on decisions to consume or invest. A large literature develops this theme

ALL financial institutions in the United States are regulated to greater or lesser extent and are encumbered with restrictions that range from regulation of entry to restrictions on the purchase of particular assets and of the rate of interest paid on particular liabilities (Gies, Mayer, and Ettin, 1963). The owners of financial institutions are, in part, compensated by special treatment under the tax laws (Keith, 1963), so that the net effect of governmental laws and decisions on the volume of assets invested in financial institutions—as well as the relative effect on the various specialized institutions—is difficult to calculate. The effect on resource allocation of these restrictions and tax shelters is unknown also.