This paper explores the question of whether private assets are sufficient to provide liquidity for the efficient functioning of the productive sector, or if the state needs to play a role in creating and regulating liquidity through adjustments in government securities or other means. The authors develop a model where firms can meet future liquidity needs through issuing new claims, obtaining credit lines from financial intermediaries, or holding claims on other firms. In the absence of aggregate uncertainty, these instruments are sufficient to achieve the socially optimal contract between investors and firms, which includes a maximum leverage ratio and a liquidity constraint. Intermediaries coordinate the use of liquidity, preventing the wasteful accumulation of liquidity by firms with low liquidity shocks. When there is aggregate uncertainty, the private sector is no longer self-sufficient in liquidity. The government can improve liquidity by issuing bonds that commit future consumer income, which command a liquidity premium over private claims. The government should manage liquidity supply by loosening it when aggregate liquidity shocks are high and tightening it when they are low. This provides a microeconomic rationale for government-supplied liquidity and active government policy in managing liquidity.This paper explores the question of whether private assets are sufficient to provide liquidity for the efficient functioning of the productive sector, or if the state needs to play a role in creating and regulating liquidity through adjustments in government securities or other means. The authors develop a model where firms can meet future liquidity needs through issuing new claims, obtaining credit lines from financial intermediaries, or holding claims on other firms. In the absence of aggregate uncertainty, these instruments are sufficient to achieve the socially optimal contract between investors and firms, which includes a maximum leverage ratio and a liquidity constraint. Intermediaries coordinate the use of liquidity, preventing the wasteful accumulation of liquidity by firms with low liquidity shocks. When there is aggregate uncertainty, the private sector is no longer self-sufficient in liquidity. The government can improve liquidity by issuing bonds that commit future consumer income, which command a liquidity premium over private claims. The government should manage liquidity supply by loosening it when aggregate liquidity shocks are high and tightening it when they are low. This provides a microeconomic rationale for government-supplied liquidity and active government policy in managing liquidity.