**John Richard Hicks Money and Uncertainty**

Soon after publishing his Theory of Wages (1932) Hicks came to feel that his failure to account adequately for monetary phenomena had ruined the greater part of that book, and he soon turned his attention to money. Hicks at this, time was still at the LSE lecturing on general equilibrium theory from the viewpoint of Walras and Pareto, and the theory of risk along the lines of Knight and Hayek. The elasticity of substitution and indifference curves were the progeny of the former lectures; the properties of economic probability distributions and stock-flow distinctions, especially in relation to the balance sheet of assets, were the progeny of the latter. Specifically 'It was through Risk that I got to money' (Hicks, 1977).

Hicks's seminal article in this area is his 'Suggestion for Simplifying the Theory of Money' (1935). Characteristically Hicks arrived at his insights into monetary theory by applying marginal utility or value theory to the choice between money and securities at the margin. To Hicks the crucial question of monetary theory is why people hold money rather than interest-bearing securities. 'Either we have to give an explanation of the fact that people do hold money when rates of interest are positive or we have to evade the difficulty somehow', and Hicks sees velocities of circulation and natural rates of interest as the great traditional evasions. His own answer to this question is pregnant with insights and in fact it anticipates the monetary developments of Keynes's General Theory. But it also does far more than this and in effect laid the foundations of the portfolio theoretic approach to the demand for money by specifically outlining a transactions demand for cash and a risk aversion demand for cash and establishing the permanent income or wealth constraint on the demand for money.

For example, Hicks first notes that whether or not transactions balances are invested in bonds will depend on a comparison of the costs and benefits involved. 'The net advantage to be derived from investing a given quantity of money consists of the interest or profit earned less the cost of investment'. However he further notes that the expected profits from bonds is in general uncertain and therefore a risk factor is involved which means that the particular expectation appropriate to riskless situations then has to be replaced by a band of probabilities. 'It is convenient to represent these probabilities ... by a mean value and some appropriate measure of dispersion'. Thus the whole basis of portfolio theory was set out which allows every asset to be characterised by two parameters: its expected returns (mean value) and the variance of these returns (standard deviation) as a measure of risk. Money is then viewed as one asset in a continuum of assets each differing as regards return and risk. Furthermore money is simply an extreme part of this liquidity spectrum-it is perfectly liquid, it is riskless and it bears no rate of return.

Another novel element in this paper is the discussion of the relevant budget constraint: 'Total wealth in our present problem plays just the same part as total expenditure in the theory of value. In the theory of money ... the individual's demand for money will respond to a change in his total wealth'. And in a footnote Hicks continues 'Of course [the Classics] say "income". But in this case income can only be strictly interpreted as "expected income".'

This incisive analysis of the central questions of monetary theory obviously foreshadowed the writings of Baumol (1952), Tobin (1958) and Friedman (1956) respectively (although none of these authors make explicit reference to Hicks (1935)-probably because in the fifties it was not a widely read or recommended piece of work). However Keynes at least appreciated the significance of Hicks's analysis and on being sent a proof of the article replied in December 1934: T like it very much. I agree with you that what I now call "Liquidity Preference" is the essential concept for Monetary Theory' (Hicks, 1977, p. 142). Perhaps because of this apparent similarity in research interests Hicks was asked to review the General Theory for the Economic Journal on its publication in 1936. This turned out to be the first of a number of reviews-in some respects Hicks can be said to have been reviewing the General Theory (in the sense of placing it in a modern perspective) ever since-but it was his second review (1937) which became the most famous and to which we now turn.