Maurice -
...So, if it becomes fashionable to not hold cash, that would have a big impact on the number of dollars which could remain in circulation. If everyone treated a dollar like a hot potato, holding a much smaller cash balance, then I suppose other things would go up in relative value [= price]. There would be inflation. Uncle Al would have to cut the number of dollars and raise interest rates to maintain currency value stability.
Is that right?...
Almost, with some technical quibbles.
First, unless money is physically destroyed, it has to be held by someone. Circulation of money is a myth, as every dollar is part of someone's cash balance at every instant.
However, the subjective marginal utility of money (value) can decline if it is re-distributed into the cash balances of people with lots of money from the cash balances of those with little money. In the limit, all cash is held by a single individual, who suffers hardly at all if he loses the use (and companionship) of the dollar that satisfies his least urgent want at the margin.
This is the same idea that makes the stock market work. When the founder and sole owner of a company considers selling off the first share of the company, that single share has the lowest possible marginal value to him, but the maximum possible marginal value to a prospective buyer. Thus both the buyer and seller of the single share are better off after the transaction, and can now go on to consider the sale of a second share under the new ownership condition.
Regards, Don |
