Timeless economics

Still makes sense.. and we’ll always have Paris..


with 3 comments

What is Money?

This question seems so elementary and self-evident.

Money is, after all, the colored pieces of papers issued by the government that we have in our pockets. But is that it? Even if one were to accept that as a satisfactory answer, what exactly are those pieces of paper for? Are they themselves the “money” or do they represent something else that is the “money?” and where do those pieces of paper come from, and are those pieces of paper considered money as opposed to anything else? We all want money, and devote our lives to getting it.

Let’s start to a textbook definition of money and from there, we proceed. Most definitions include only two parts, some add a third. According to them, money is:

Ø a medium of exchange

Ø a store of value

Ø a unit of account

If you look closely at the first two definitions, you will see that money exists in the minds of those who use it. This is partially true for the third definition as well. (note: “For all of you monetary theory geeks out there, please relax! These are deliberate simplifications designed to make the ideas accessible to a general audience and not a detailed exposition of precise financial models. Heheh”)

Ø I can exchange my money for stuff…

Ø I can exchange my money for stuff later…

Ø I can exchange my money for a predictable amount of stuff later…

Let’s think about what is happening right now. Money has value because people will exchange or give you stuff for it, both now or in the future. But why will they do that? They have to believe that they can trade it onward in turn for stuffs they want. So the utility value of money is based on a set of collective beliefs – what Carl Jung referred to as the Collective Unconscious. This is the set of beliefs that are widely held by a group of people at a deep level and upon which they will act without thinking about it. One can think of this as the unstated assumptions of a society. In the United States, the dollar has had a stable or relatively stable value for so long that few would ever consider NOT accepting it in exchange for stuff. The dollar as money is a deeply embedded part of our Collective Unconscious, both here and around the world.

Though there are many who are beginning to question the value of the dollar as money, the number is still miniscule as a percentage of society. Even if a person were to cease to believe in the dollar as money in their own mind, they would still accept it as long as they believed that others would accept it from them in exchange for goods. So externally, they would act as if the dollar was still money, even if they no longer held that belief. That is what puts the collective in unconscious. At some point, things deteriorate sufficiently that everyone KNOWS that everyone else is just pretending. That is the point of universal hypocracy just before the belief system breaks down.

Printing Dollars Destroy Money?

I agree that money, or better said “moneyness” attached to an issued currency, exist only in the minds of people, but printing dollars does not simply destroy money. Excessive printing may destroy (lower) the standard of value of dollars (inflation) while leaving the liquidity component intact. It is clear that from a purely physical point of view, a central bank can create as much currency either physical or electronic, as it wishes – subject of course to certain practical constraints such as logistics. But money exists solely in the minds of people. It is essentially a matter of faith and faith is not something a government or central bank can print or conjure from thin air. The value of the dollar is the credibility built up over two centuries of the US Treasury always meeting its obligations. The money is the widely held belief that the US government will guarantee that dollar holders will always be able to get things of value in return for their dollars, which is backed by generations of positive experience.

Now, please ask yourself, does creating more currency enhance or damage that belief system? The answer should be self-evident. The very act of creating more dollars ensures that the purchasing power of every existing dollar is diluted. There is only one scenario under which this will not damage the purchasing power of the dollar – if and only if those created dollars can be used to add a roughly comparable amount of value to the pool of available goods and services available for purchase. That is precisely the role of well-functioning credit system: to allocate capital to useful expansions of capacity and new business ventures in order to create that added value. This is why such a credit system can actually create money through credit. Because the act of printing dollars would have no such offsetting value-added, the arbitrary creation of more dollars undermines the faith which is at the root of money’s very existence.

A central bank can print currency but it cannot print belief – which is what money really is.

The great Adam Smith said it well:


(Adam Smith, Paper Money, 1981)





Written by lothielicious

March 24, 2009 at 4:19 PM

3 Responses

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  1. but there was this another economist who proposed that the government should print more money to solve the economic problems or any deficit there may be. your economist must be wrong. 😛 -sir knows who the economist i am talking about.


    March 25, 2009 at 11:12 AM

  2. Rodney, if money is a matter of belief, and folks in Zimbabwe don’t believe in the money printed by the government, then the Keynesian fix won’t work. Good old sleepwalking Adam S. is right..

    Orlando Roncesvalles

    March 26, 2009 at 4:43 PM

  3. hahaha, well sir, zimbabwe is poor because they did not use their money well. when they printed all the money which resulted to their inflation it is because of political factors including how they allocated it and to which use they put it to. i do believe that money is about belief and faith in what you have in your pocket of safe deposit boxes, but the question would be, to what extent would adam smith say that belief is what makes the value of a currency??? is it enough for me to say i believe my one peso is worth 1000 USD and eureka! i can buy a ford focus with a couple thousand pesos… what do you think sir? – there should be a scope and limitation to what belief would be, and not an infinite assumption. “peace”


    March 28, 2009 at 10:27 PM

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