Further comment on the fixed quantity of money thesis.
Assume a microeconomic economy where there is one buyer, an intermediary,
and a seller. The intermediary functions to hold money and product, a
storekeeper. The only money is currency.
The seller goes to the storekeeper and exchanges product for currency in
some fixed relation, x quantity of product for y units of currency. The
buyer goes to the storekeeper and exchanges currency for product, x for
y. This exchange recurs repeatedly and everything is equilibrium. The
storekeeper has on hand or creates enough currency to satisfy the next
transaction, and since the buyer provides enough currency for the quantity
demanded, no new transactional units of currency are needed.
Now let's say that the seller creates more product than previously, but
still wants to sell all the product to the storekeeper. The storekeeper
can't accommodate the transaction because he doesn't have enough currency
on hand. Therefore, the storekeeper declines the transaction.
Let's say the buyer becomes aware that the seller has more to sell than
usual and the buyer would like to buy that extra. If the storekeeper can't
accommodate the transaction due to lack of transaction medium, the buyer
will go to the seller and barter. That isn't efficient. Better that a
storekeeper handles the transaction with the various unspoken complications
that can arise wrt any transaction.
The storekeeper is aware of this possibility so if a seller has more
product to sell and the amount of fair representation of product in the
form of units of transactional exchange is less than needed to fairly
represent the increased quantity of product offered, the storekeeper will
create new units of transactional exchange and give them to the seller.
After the purchase a buyer might show and might not buy all the product
available. What isn't bought sits as inventory, so the storekeeper has
inventory of product and debt to the seller for exchange units created
secured by product. If all is purchased, then the storekeeper can return
all the new units to the seller.
In this idealized model transactional efficiency isn't facilitated unless
further units of exchange are synthetically created. This model contains
the essence of credit.
No one can argue about whether such synthetic creation is trustworthy,
because the efficiency gained is worth more than the quantity of money at
risk. The point here is that what defines value is what generates action.
Those economic quantities which are deemed value but don't cause economic
action, actually have no value. Thus art is worthless, and equivalently,
priceless. True for air and water too. The argument of economic quantity
value always lies at the margin: what generates marginal economic action.
This is what was behind my comments about "stretching" the marginal dollar.
Human desire causes effort to bring about a result which can be modelled by
stretching the marginal held dollar. Thus even if there was only so many
units of currency in circulation and none ever were created beyond this
total(assuming no physical deterioration) the representational value of
money would fluctuate due to this factor of human desire. When this factor
is widely held, for example, the wealth effect, the representational value
of money can be extremely distorted and cause all sorts of economic
dislocations. |
