Having money and being able to spend it right now are two different problems. Liquidity is what closes the gap between them — or doesn’t.
Liquidity measures how easily an asset converts to cash at close to its full value, on demand. A house and a bank deposit can represent identical wealth on paper and behave completely differently in a crisis: one takes months to sell, the other clears in seconds. Liquidity, not net worth, is what determines who can actually meet an obligation when it falls due.
Keynes identified a specific failure mode of this in 1936: a liquidity trap, where interest rates fall so low that people hoard cash regardless of how cheap borrowing gets, because they expect rates can only rise from here — monetary policy loses its grip on the economy entirely. The mechanism generalizes past central banking: any system where value only exists while it’s flowing — spent, lent, exchanged — creates a structural incentive to hoard the moment confidence drops, which is exactly the moment liquidity is needed most.
Source: Keynes, J.M., The General Theory of Employment, Interest and Money, 1936; Sutch, R., “Reading Keynes at the Zero Lower Bound: The Great Depression, the Liquidity Trap, and Unconventional Policy,” 2018 (DOI: 10.1017/S1053837217000013).