Hey Guys,
I have a question regarding What has Government Done to Our Money? In the Summary of the first part of the book, Murray says the following: "The “price” of money is its purchasing power in terms of all goods in the economy, and this is determined by its supply, and by every individual’s demand for money."
Here's my question: when he says that every individual have a demand for money, is he talking in the sense of the person who makes money? For example, let's say that I own a business who wants to sell his products for profit. Since I have a demand for money, does that mean that my demand is what is giving money more purchasing power?
If it's in the sense of the consumer, then doesn't that mean that in order for the public to get more money, the money supply has to be increased?
I'm having a hard time understanding what Murray means by that statement. Anyone that can help me understand will make my day.
Demand for money means a demand to hold money. It is increasing your cash balance in your wallet, under the mattress, in your bank account, or wherever. Basically it's hoarding.
Adam.:If it's in the sense of the consumer, then doesn't that mean that in order for the public to get more money, the money supply has to be increased?
It doesn't matter whether it is the consumer or not. Are you asking "if the demand for money increases, doesn't the money supply have to be increased to meet this demand?"
As DD5 said, the demand for money is cash holdings, money in the pocket, in a bank account, etc. The money supply does not have to be increased. Any supply will do. If there is an increase in the demand for money, money would be taken out of circulation and held in banks or in pockets or under the mattress. This would tend to increase the purchasing power of money being exchanged for goods in the market.
Under a commodity based system, such as gold, each gold ounce would be exchanged for more goods over time due increasing productivity or an increased demand for money. However, the gold miners would see a signal to increase production as purchasing power of each ounce of gold has increased (their cost of production would, temporarily, decrease because they pay for labor, etc in gold ounces in a commodity based system). New gold would enter the economy, inflationary effects would be seen, but then gold production would slow down in response to decreased purchasing power. This is a self regulating system. But then government abolishes commodity money and introduces the fiat system. The self regulation of the money supply vanishes, and we have the chaos of the central bank.
I've seen the following article on other threads. It is at a rather advanced level, but it explains the "demand for money" and the reactions under a commodity based system and a fiat system The Demand for Money and the Time Structure of Production. I suggest searching under "demand for money" on the home page for more information on the subject.
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
What Rothbard means is the demand for cash holdings. The future is always uncertain, so people feel a need to keep money on hand just in case. The extent of a person's demand for cash is essentially their perceived risk. If the probability of an emergency arising seems higher, I'd want to keep a bigger emergency stash than I would if everything feels relatively safe. When the demand for money decreases, people are more willing to spend their money rather than save it. This pushes up demand curves and, thus, raises prices. Conversely, when the demand for money increases, the pool of spendable money decreases, which lowers demand curves and lowers prices.
What you're referring to I believe is a money's marketability. A commodity is used indirectly in an exchange in order to avoid the problem of double coincidence of wants. The more marketable a commodity is, the more likely someone will be willing to accept it in an exchange. Thus, the commodity which becomes most accepted as a medium of exchange is the commodity that is the most marketable.
The demand for money cannot be satisfied by increasing the money supply as the demand for money is an autistic exchange: Do I spend this money now, or save it for later? What is valued is not the money itself (with the exception of the money's non-monetary uses, for example, using gold to make jewelry or using federal reserve notes to make a bonfire), but rather the potential for the money to be exchanged for some other desirable good. So really, when the choice is made, it is not a decision between keeping the money and spending it, but rather a choice between a present good and a future good.
Increasing the money supply pushes up demand curves across the market, lowering the money's purchasing power. In reality any money supply is an optimal money supply, as demand curves (and thus prices) will simply adjust.
People create a demand for money when they perform the necessary actions in order to obtain it and by giving up doing things that would not. In society, in order to obtain money, we work. By going to work each day and giving up sleeping an extra 2 hours or skipping out on work altogether, we create a demand for money. So I would say that yes, the business owner creates a demand since the business owner is seeking a profit by selling a product and the consumer would create a demand for money by working for a business or maybe starting his or her own.
This is how I see it and if anyone could make corrections to my understanding, if necessary, I'd greatly appreciate it.
jmorris84: People create a demand for money when they perform the necessary actions in order to obtain it and by giving up doing things that would not. In society, in order to obtain money, we work. By going to work each day and giving up sleeping an extra 2 hours or skipping out on work altogether, we create a demand for money. So I would say that yes, the business owner creates a demand since the business owner is seeking a profit by selling a product and the consumer would create a demand for money by working for a business or maybe starting his or her own. This is how I see it and if anyone could make corrections to my understanding, if necessary, I'd greatly appreciate it.
You're more referring to time preference with regards to leisure. A genuine phenomenon but I don't think you can truthfully call it "demand for money."
When I wake up in the morning, I could either go to work or I could stay home and take a day off. What I'm making a choice in is whether to enjoy some satisfaction now, or do something with my time instead that will give me a greater satisfaction later.
Whatever I do doesn't have to be for money. For example, a friend of mine could offer me his vacation home in Bermuda for a week in exchange for me fixing his roof today. No money is involved in this transaction but the end result is still the same: I could enjoy some relaxation now, or I could enjoy a better relaxation later.
Time preference is related to the demand for money, but they aren't necessarily the same thing.
You walk into a store and a case of beer costs $20. You have $20 in your pocket. Would you rather have the $20 or the beer? If you value your $20 more than the beer then you choose to keep your money. Why? Because you can think of other things you'd rather spend $20 on instead of beer. But the price of beer is $20 because there are enough people that would rather have it than $20. Some would choose beer over $30, but if the merchant raised beer's price to that level then there would be fewer buyers and profits would fall.
Lets say you are saving up $2000 for a car or say you are expecting to lose your job next month and want to save up some money. Your demand for money has increased. You won't be buying beer at $20, but someone else will. That's why beer's price is still $20. Now, say many people start to loose their jobs and start to have houses go into foreclosure. Everyone wants to save up money because they want more financial security. They are demanding $20 savings instead of beer. For the merchant to sell his beer he will have to lower the price until people prefer beer over money. Even though people demand to accumulate savings, if they see beer on sale for $12 they may now prefer beer over money. They buy beer at $12. Because their demand for money increased, the price of beer had to fall in order to find buyers. Because fewer dollars could now buy the case of beer - the money gained purchasing power.
Mainstream Economists don't call it demand for money. The call it money velocity. If money velocity falls (demand for money increases) then they claim that you get deflation. If money velocity increases (demand for money falls) then you get inflation. They have this equation M*V=P*Q and call it the Quantity Theory of Money and they claim that this equation is the rule which relates volume of money and money velocity to rising prices. It's a load of crap. Hazlitt debunks it in The Failure of the New Economics. There is a relationship between demand for money and prices in the economy, it just doesn't follow that above equation.
http://en.wikipedia.org/wiki/Quantity_theory_of_money
See it debunked in the chapter starting on page 296 here: http://mises.org/books/failureofneweconomics.pdf
I haven't read this but there could be something here:
http://mises.org/journals/jls/19_1/19_1_3.pdf
This is right, as far as it goes.
Let's start with what demand means for other things, say yachts. Everyone would love a free yacht. But that doesn't mean there is a universal demand for yachts, in the sense that "demand" is used by economists. To an economist, you are part of the demand for a yacht if 1] you want a yacht and 2] you have the means to buy one.
So that your description of people actually doing what it takes to make money is vital for them to be part of the demand for money, in order to fulfill requisite 2]. But as used by economists, a demand for money also means that given money in your pocket and a choice of what to do with it, you decide "I will keep it right here in my wallet and not spend it." The moment you go out and spend it, even though you keep working at your job and want more money to spend, you have to reduced the demand for money. You want apples and bananas now, not the money [except as a means to get the apples and bananas, which doesn't count in this technical definition of demand for money].
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