Economists are fond of defining money by enumerating
its uses. The ECONOMIST Magazine had an
article on the topic. It first reviewed
the standard definition:
“Money fulfills three main functions. First, it must
be a medium of exchange, easily traded for goods and services. Second, it must
be a store of value, so that it can be saved and used for consumption in the
future. Third, it must be a unit of account, a useful measuring-stick. Lots of
things can do these jobs. Tea, salt and cattle have all been used as money.”
Economists do a substantial disservice to the
public's understanding of the role of money by enumerating its potential uses
as if they were all equally important.
As is discussed below, there are important caveats to the notion that
money is a store of wealth. If money is
not channeled into something that produces in the future, there is no wealth in
the future.
ECONOMIST magazine goes on to describe the function
of money as reducing the cost of barter (“On the Origin of Specie,” Aug 18th
2012). The emphasis on reduced cost of
barter has the advantage of automatically explaining the benefit of having a
well-functioning currency. There is
tremendous benefit to society from making barter (trade) less costly. It introduces tremendous efficiencies into
the economy. Reduced costs of exchange
allow the same resources to produce more benefits to society.
Considerable controversy about monetary policy and
the government's role can arise from placing different emphasis on “store of
wealth” verses “media of exchange.” That can be seen immediately from the fact
that inflation is inherently an issue "across time." So, it relates only to the role of money as a
store of wealth. If one places a high
value on the role of money as a medium of exchange and a low value on the role
as a store of wealth, one’s policy conclusions will be different from those of
somebody who inverts those priorities.
The focus on making barter efficient can lend
perspective to this often contentious debate.
The role of money as a store of wealth can be viewed as making barter
more efficient. However, in the case of
"store of wealth" the barter is across time. Essentially, the store of wealth function of
money relates to only a subset of the broader category of medium of
exchange.
Monetary theorists do not seem to realize that the
issue of whether the different roles of money can be separated is more
important than the emphasis on specific aspects of the role of money. Clearly, they can be separated for prolonged
periods of time. Further, there is a
distinct possibility that too much emphasis upon the role for money as a store
of wealth is counterproductive. Wealth
can never be produced by money. It is
always produced by the effective deployment of resources to produce in the
future.
If a substantial portion of the population does not
know how to use current resources to produce in the future, money may have a
default role as a store of wealth. When
money fills that default role as a store of wealth, it becomes a mechanism by
which society can transfer current productive effort into the future, but for
that to happen the money must be entrusted to someone who can effectively use
it to produce in the future. In that
respect, the size of the financial service industry, or at least its
importance, is inversely related to the portion of the population who know how
to productively employ resources. If few
people know what to do with money other than spend it, they need a large
financial service sector to channel resources into future production.
Differences in the emphasis placed on the various
functions of money are often assumed to relate primarily to one's balance sheet. Specifically, the role as a store of wealth
is far more important to those with wealth.
Those with debt, on the other hand, do not want money to function well
as a store of wealth. They benefit from
a depreciating currency. But they will care whether it is an effective means of
exchange.
A strong argument can be made for the position that
the wealth is not the cause for the attitude about the importance of money as a
store of wealth. Both the wealth and the
belief that money should serve as a store of wealth reflect an individual's
preference for income in the future rather than immediate consumption. The inverse is also true. Those who think the exchange value of money
(i.e., the ability to spend it) is most important probably are those most anxious
to spend it now.
It never seems to occur to people that what applies
to the individual may also apply to the entire society. A society that is wealthy and producing
wealth may lean toward a stable currency, while a society in decline where
wealth and income are falling favors a currency that is declining in value
along with their income and wealth. What
is not clear is the direction of causality.
Does a society with growing income and wealth want a stable
currency? Or, does a stable currency
produce rising income and wealth within a society?
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