CASE M. SPRENKLE (1969), in a refreshing departure from the elasticitygrubbing that constitutes most empirical work on money demand, examined predicted vs. reported levels of cash holdings in firms, using the equation derived by Baumol (1952) and Tobin (1956) as his predictor. Sprenkle concluded that compensating balance requirements, and not asset management decisions taken to cover transaction needs, are the most important data in explaining the amount of cash held by business firms. In this note, I argue that his results do not support his claim of showing "the uselessness of transaction demand models." Rather, they stem from (a) the inadequacy of the Baumol-Tobin (B-T) model as a representation of cash flows, and (b) the irrelevance of cash balance data contained in financial reports to empirical research on money holdings. I also show that Sprenkle's heavy reliance on the importance of compensating balances is misplaced. II. TRANSACTIONS DEMAND MODELS AS PREDICTORS He sets out to show "how little . . . [the B-T model] . . . really explains, how subject to error the results of the theory are, and how fruitless more sophisticated versions of the theory are apt to be." He shows that the model does a poor job of predicting the level of cash holdings in large business firms, and concludes with the obiter dictum that compensating balances determine the levels of business cash holdings. The Baumol-Tobin model depicts the cash flow as a sequence of k receipts per year, each one being followed by a steady stream of payments which just exhaust it. That representation is a priori unreasonable. A large part of any firm's cash transactions are with other firms, so few firms, if any, can show the cash flow pattern assumed in the B-T model. Also, direct evidence from a few firms shows a random mixture of odd-sized daily net receipts and payments. In those observed cases, the running mean of daily cash activity rapidly converges to a value close to zero; the daily flows have no significant underlying periodicity, and certainly no trend or "drift."' The B-T model, by contrast, assumes that the cash account level is extremely periodic, if it is left unadjusted. * NSF research support is gratefully acknowledged. This note is a spin-off from a longer paper that has been presented before several helpful audiences. Thanks are owed to R. Clower, M. Darby, J. Kindahl, A. Leijonhufvud, L. Meyer, R. Schmalensee, C. Sprenkle, and Jack M. Guttentag, for useful comments. The usual disclaimer on sources of error applies. ** Professor of Economics, University of California, San Diego. 1. One day is the ideal interval at which to observe cash flows, since returns on short-term securities can be realized on a daily basis, and banks monitor the demand deposit accounts of their customers once per day.