What Is Money, Anyway?
And how do we measure it?
Money is a difficult subject. There's much confusion as to what it is. There's even more confusion as to the best way to measure it. Yet, before we can measure it, we have to define it.
Here's a description I pieced together from a few re-ordered sentences of Rothbard's classic text: What Has Government Done to Our Money?
Money is a commodity used as a medium of exchange.
Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its "price" in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People "buy" money by selling their goods and services for it, just as they "sell" money when they buy goods and services.
Money is not an abstract unit of account. It is not a useless token only good for exchanging. It is not a "claim on society." It is not a guarantee of a fixed price level. It is simply a commodity.
Now we may ask: what is the supply of money in society and how is that supply used? In particular, we may raise the perennial question, how much money "do we need"?
Must the money supply be regulated by some sort of "criterion," or can it be left alone to the free market?
All sorts of criteria have been put forward: that money should move in accordance with population, with the "volume of trade," with the "amounts of goods produced," so as to keep the "price level" constant, etc.
But money differs from other commodities in one essential fact. And grasping this difference furnishes a key to understanding monetary matters.
When the supply of any other good increases, this increase confers a social benefit; it is a matter for general rejoicing. More consumer goods mean a higher standard of living for the public; more capital goods mean sustained and increased living standards in the future.
[Yet] an increase in money supply, unlike other goods, [does not] confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices -- i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value.
[Thus] we come to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the gold-unit [monetary-unit].
The online book is a great read and I highly recommend reading it in its entirety.
The key point above is that an increase in money supply confers no overall economic benefit. Over time, money simply buys less and less.
At any point in time, however, when demand for money increases (people want to hold it as opposed to buy goods and services), prices of goods and services decline. This can happen even as money supply increases. It's happening now.
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