Synopsis
Some people have said that fish do not know that they are in water. I don’t know the truth of that statement. I have never had extensive conversations with any fish. Most people do know that they live in “air.” Beyond that knowledge, they know little about something without which they cannot live.
In many respects, the same holds true of “money.” They don’t think much about what qualifies as “money.” They do not consider in great depth the role of “money” in their lives. They know that if they give a store the number of dollars and cents on the price tag, they can walk out of the store with the product.
Should people know more about “money?” People do vote for people who confiscate (tax) and spend (redistribute) a large portion of their “money.”
I will devote the The Free Market Center Journal to discussing with you why “money” (& banking) makes a more interesting subject than it appears on the surface. (And I will explain why I put “money” in quotes.)
You will find below an annotated outline of some of the topics about which I plan to write in the weeks ahead.
Definition of Money
I will begin with an in-depth examination of the definition of “money.”
Money consists of any economic good, or any claim on such a good, that serves as a general medium of indirect exchange and that acts as a final means of payment.
An Economic Good
A resource used by humans (a good) in sufficiently limited quantities to give it market value (an economic good).
Indirect Exchange
The acceptance of a good in exchange with the intent of exchanging that good for a third good.
Money: Not for Consumption
Because traders accept “money” for the sole purpose of indirect exchange, people do not consume a good used for “money.”
General Acceptance
To qualify as “money,” goods used in indirect exchange must be accepted by a fairly wide range of traders.
Final Payment
When someone accepts a medium in payment, it concludes the transaction. It requires no further collection on the part of the payor, e.g., loans, credit cards, etc.
The Value of “Money”)
It’s critically important to understand that the subjective value theory applies to Money as well as other economic goods.
Source
Money, like any economic good, derives its value from the subjective judgments of individuals.
Measure
The measure of the value of “money,” again like any economic good, derives from the relative preferences of individuals.
Role of Money
Although the primary role of Money consists of acting as a medium of indirect exchange, its role extends into other levels of economic activity.
Money as Proxy
Money does not act as a measure of value, but it does act as a proxy or an indicator of value. Thus, it plays an important role in economic calculation.
Money Prices
Money prices provide an important indicator of economic activity. It is important, however, to note that the only thing for which people can account is the quantity of “money” transferred.
General Prices
General prices respond only to the quantity of “money.” With a fixed quantity of “money,” general prices would stay relatively stable.
Price Inflation
General prices increase as a result of the increase in the quantity of “money,” and the influence of that increase spreads from good to good throughout the economy.
Price Deflation
General prices decrease when a rare decline in the quantity of Money occurs.
Money Myths
A lot of myths seem to develop around Money and the banking system. I will collect those myths and address them periodically.
Debt vs. Money
A distinct difference exists between debt and claims used as “money.” This distinction provides the foundation for the repudiation of the misconception that “money” equals debt.
Money Lending
Although a number of people see money lending as a negative influence, money lending has a legitimate role in the effective allocation of limited resources.
Lending as an exchange.
We should consider lending — of Money or any other economic good — as simply the exchange of current goods for future goods. This might help facilitate the understanding (or clear up the misunderstanding) of the role of money lending.
The purpose of lending: why not evil?
Lending serves the purpose of putting idle or unused resources to better use. Money lending simply offers an indirect method for allocating resources.
Money Quantity
The quantity of Money — particularly changes in the quantity — has a significant impact on specific sectors of the economy and their impact on the behavior of the overall economy.
Money Inflation
Causes
Money inflation occurs when banks (in a fractional reserve banking system) issue new money dollars to buy assets.
Problems
Money inflation causes problems because it signals to specific sectors of the economy a shortage in supply, triggering an increase in production. The unsupported increase in production will ultimately lead to a decline and crash, which can ripple through the economy.
Money Deflation
Causes
A decline in the quantity of Money — money deflation — occurs (in the fractional reserve system) when banks reduce the amount of assets in their portfolio.
Problems
The decline in the quantity of Money available to specific sectors of the economy will cause prices in those sectors to decline, triggering a reduction in production and having a negative effect ripple throughout the economy.
Monetary Measures
[I may want to switch the terms monetary measures and money aggregates. See synopsis of money aggregates.]
In this section, I want to discuss the pros and cons of various measures of economic activity.
CPI
The consumer price index has numerous flaws when it comes to measuring changes in general pricing. It assumes a relatively stagnant nature of the economy, which is obviously false.
GDP
The gross domestic product, as an economic measure, has multiple inconsistencies. One cannot measure production by the dollars exchanged. Feedback effects cause activity in various sectors of the economy to either amplify or negate the effects in other segments of the economy.
Money Aggregates
Economists use various monetary aggregates to indicate the quantity of “money” in the economy.
M1
Currency, traveler’s checks, demand deposits, and other checkable deposits
M2
M1 plus retail money market mutual funds, savings, & small time deposits
MZM
(Money Zero Maturity): M2 less small-denomination time deposits plus institutional money funds. (No longer used as a measure of money quantity. )
Alternative Monetary Theories
There are a number of other monetary theories, some of which we will address in this space.
Money as Debt
Examine this as the basis for a monetary theory. Also, refer to the “money” myth: debt versus “money.”
Modern Monetary Theory
I have delved into “modern monetary theory” in the past. I want to devote more space to debunking MMT. I see it as the most dangerous and misguided “theory” related to “money” that has ever been advocated. Because of the seeming growth in its popularity, MMT needs a forceful and detailed refutation.
Conclusion
I hope to bring the subject of Money and banking to life for you. “money” plays such an important part in your life that it behooves you to learn more about it.
Note: I have put “money” in quotes to alert you that commodities and claims frequently have multiple roles. Also, don’t consider the list of topics above as exhaustive. I will add, delete, or consolidate some of these subjects as I progress.