"liquidity" refers to how quickly money can move to where there is demand for it. That's all. The lack of liquidity under a gold standard was a primary reason why there was demand side deflation and severe liquidity shocks, creating the famous deflationary spirals. if you divide up the money supply between different layers (and there's friction moving between them) that reduces the liquidity in any one place. so a "liquid layer" is one where money can easily flow to where it is needed without friction. The Assholes Who Run the World leveraged those liquidity problems to get off the gold standard and take complete control of the money supply. but that doesn't mean that those problems are completely dismissible. a hard cap is a knee jerk reaction to their fiat insanity. it is not good monetary policy.