Can there be not enough money, to prevent it to… be money at all? Can the amount of money be constant? How would non-inflationary money function?
▪ Can there be not enough money?
1. Can there be not enough money? Anyone who has felt dissatisfied after checking the contents of their wallet or bank account, may find this question a grim joke. “Of course” – the person will answer – “there can be not enough money”! After all, most of us at different times in our lives had fewer money than we wanted or needed.
It is more difficult to answer a more precise question: can there be not enough money in the economy? Can the amount of money held by market exchange participants and intermediating in transactions be too small? Could there be not enough money to enable it to… be money at all?
If we take the policy of modern countries as the right starting point for our considerations, the answer will be: yes, there may be too little money. Why? As the economy grows and expands, more money is needed to reflect the monetary value of new goods and services and to handle more and more transactions. This is one of the reasons why central banks control the money supply as part of their monetary policy: by manipulating the interest rates, buying or selling government securities, or changing the reserve requirement level. Everything is based on the unspoken but implicit assumption that the total face value of money in circulation should equal the total value of goods and services traded on the market over a given period of time. From there, there is only a step to recognizing the need to control the money supply and granting the central bank the exclusivity to issue money. However, is this the correct point of view?
The central bank, which monopolizes the issuance of legal tender, has the tools to conduct monetary policy – some of them enable theoretically almost unlimited increase in the money supply. The examples of Zimbabwe after 2000 or modern Venezuela show that the possibility of free creation of money with no real value is a real threat. But wouldn’t it be even more dangerous if governments and central banks could not increase the amount of money at all? Maybe it is necessary to moderate the money supply, and not to completely refrain from increasing the amount of money in the market – because in such a case money might simply be lacking?
▪ A Praxis story
2. Today it is difficult to find a good that would meet the requirements of being good money, and that we would be sure that its supply would not increase – even the most valuable precious metals are still being mined and new deposits are still being discovered, so there is no certainty that one day, for example, the supply of gold will not increase significantly. In addition, almost every raw material that can become commodity money has a non-monetary use (gold is used in industry and in the production of jewelry, etc.) – which has an impact on changes in its value on the market. Therefore, let’s look at a fictional example that will help to better illustrate the point.
Let’s move to a distant galaxy, though not so long ago…
a) The aliens from planet Praxis discovered the remains of an asteroid that struck their home planet eons ago, leaving behind a huge crater – and an unknown mineral in the form of a shiny ore, completely unknown in their world. The metal was called misesium, And the Praxians quickly realized that it is a safe and non-radioactive metal, which on the one hand is characterized by durability and strength, and on the other hand – it is easy to melt down and divide into smaller, more handy units. Misesium was so unique that every Praxian immediately recognized it: it was impossible to create a counterfeit or unnoticed to replace it with another mineral. The cosmic ore became a favorite material of Praxian jewelers, it was used in the production of electrical cables, and tiny misesium flakes began to be added to food and drink, because many believed in the mineral’s healing power. An important discovery was soon made: misesium became so widely desired and was simple enough to divide and process that it could solve the age-old problem of Praxians, i.e. the hardships of barter. Until now, aliens – although inventive in many areas – economically remained on a primitive level of cashless exchange. The invention of a widely accepted medium of exchange and the use of misesium as bullion money was revolutionary. The soon created mints were casting bars and minting coins from this metal – and thanks to its unusual properties, it was easy to check whether a given bar or coin contained as much precious metal as the stamped money mark claimed. The Praxis economy soon became based on the misesium standard.
b) To facilitate the storage and transport of cash, paper notes for a specific amount of ore have been introduced; henceforth the precious metal itself, belonging to millions of different Praxians, could safely rest in the vaults of one bank or another, and the aliens used MisesNotes in their trade; each was marked with information on how much misesium could be exchanged at the bank; Thanks to this, the inhabitants of Praxis did not have to carry heavy bars or coins on a daily basis, because these were in their bank accounts, and they used MisesNotes to buy and sell with the appropriate amount of ore marked such as “gram of misesium”, “decagram of misesium” or “kilogram of misesium”.
c) This monetary system has been in operation for decades – but, as it happens in distant galaxies, nothing lasts forever. There have been two changes. First, the misesium deposits have run out. The metal came from an asteroid in a distant part of the galaxy and did not exist in its natural state on Praxis. Praxian astronomers predicted that there was no chance that another misesium-containing asteroid would approach their planet in the next millennia. When the last pieces of the precious metal brought by the celestial body from the far reaches were excavated and processed – the misesium deposits disappeared. From then on, only as much metal existed as was used in industry and in the form of money.
Second, misesium has lost its non-monetary use. Gold, silver and copper turned out to be more efficient and cheaper to use in the production of electrical wires. The fashion on Praxis changed when the Great Trendsetter announced the end of one style of clothing and the beginning of another: therefore, overnight, misesium jewelry was put on hold, and jewelers had to quickly switch to the trade of rings and necklaces made of beads and amber. Finally, after years of research by experts from the Praxis Dietary University, it was announced that misesium has no nutritional value: it does not help the body in any way, it is not a therapeutic agent, nor is it beneficial to health.
Faced with the depletion of misesium deposits and the loss of all the ore’s functions except monetary, the question arose in the minds of some Praxians: can misesium still be money at all? After all, the economy is thriving, every day a new value is created in the market, and the amount of misesium will be constant. Moreover everyone has given up using it in a role other than monetary. Some progressive aliens have gone further: there has been a postulate to depart from the misesium standard and to print MisesNotes on paper that no longer relates directly to the amount of ore physically lying in the bank, but is merely a symbolic medium of exchange mandated for use by all Praxians. Otherwise, the Praxi progressivists warned, we are facing a tragedy that other planets call “deflation.” If there will be more and more goods and services on the market and the amount misesium will remain the same, how will a finite amount of cosmic ore continue to function as money in the face of a potentially infinite number of new goods in the economy? For every new market value that we estimate today as a kilogram of misesium, shouldn’t we print a paper MisesNote with the word “Kilogram” as soon as possible so that the amount of money corresponds to the actual state of the economy?
▪ The answer
3. The fictitious example of the misesium allows us to consider a hypothetical situation where money that started out as a typical commodity money gains two new features: its quantity in the market is constant, i.e. the monetary inflation based on misesium standard is impossible, and it has lost all non-monetary uses, i.e. Praxians value it, save it, and use it only as money, without considering possible alternative uses in production, etc., because all these alternative functions are obsolete. If so, we can view misesium as “pure” non-inflationary money – and this allows for a thought experiment and to ask the question: why people really need money?
In a completely different galaxy, on a humble third planet from a star called the Sun, decades ago, an economist answered this question. Ludwig von Mises, because we are talking about him, wrote in his opus magnum Human Action:
“The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power”.
What does it mean? Neither man nor Praxian, or any other being with a rational mind, do not want money (whether the medium of exchange is gold, misesium, or shells) in order to have a certain amount of material.
“Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small. Changes in money’s purchasing power generate changes in the disposition of wealth among the various members of society. From the point of view of people eager to be enriched by such changes, the supply of money may be called insufficient or excessive”.
The function of money as money (and therefore excluding its non-monetary uses) is to be a medium of exchange, which means:
“(…) a good which people acquire neither for their own consumption nor for employment in their own production activities, but with the intention of exchanging it at a later date against those goods which they want to use either for consumption or for production.
Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange”.
The fundamental mistake made by progressive Praxians who demand to artificially increase the supply of paper money by continuing to print MisesNotes – and which modern defenders of central bank-controlled monetary inflation make – is the mistaken (and often unaware) identification of money with wealth, or more precisely: the demand for cash with a desire to increase wealth. It is true that economic development means the creation of more and more goods and services and the creation of previously non-existent market value – but the creation of new values does not have to be followed by the creation of more money because, as Mises noted:
“The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do. […] The choice of the good to be employed as a medium of exchange and as money is never indifferent. It determines the course of the cash-induced changes in purchasing power. The question is only who should make the choice: the people buying and selling on the market, or the government?”.
How, then, would non-inflationary money function, the quantity of which could not be increased (or it would be so difficult that it would be unprofitable)? After all, there is only a certain amount of it!
Let’s go back to the Praxians and their misesium. Let us assume, for the sake of simplicity, that the mass of the ore that was extracted from the asteroid crater was 100 000 tons. If one were to assume that the entire hundred thousand tons were put in the bank vaults, and in real trade it functions through a paper equivalent, that is, the appropriate MisesNotes, it would mean that there are one hundred million kilogram of misesium notes in the economy – or correspondingly more of their equivalents in “gram of misesium” or “dekagram of misesium.” Suppose in one year a one-kilogram MisesNote would allow the purchase of one praxee-sheep, that produce blue wool and green milk. Since the economy is growing vigorously, the Praxians are getting richer, and the amount of money in the market remains the same, there is a natural price deflation: after ten years the same praxee-sheep costs only a decagram of misesium. After fifty years, the cosmic animal is only worth a gram of misesium! What if praxee-sheep prices continue to fall? Will the banks divide the stored ore into half-gram pieces? And then they break it down into particles a quarter of a gram, and then into decigrams, milligrams, nanograms? Will single misesium atoms eventually be traded?!
This is a problem that … is not really a problem at all – because while it would be impractical to constantly divide bullion money, there are no significant contraindications for banknote equivalents for a given amount of precious metal to represent ever smaller units – as it is in the real world with non-inflationary cryptocurrencies such as Bitcoin. After all, MisesNotes will be in everyday use, not fragmentary pieces of misesium ore. However, if we consider it a problem, it must be emphasized that it is a technical and logistical problem, not an economic one. Let us recall once again after Ludwig von Mises:
“The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do”.
Therefore, it is important that money is based on something more rather than just state decrees. A unit of money does not have one specific purchasing power, that is set in stone. The purchasing power of money adapts to the new supply of goods. In other words: for the same unit of money, we can simply buy more goods if the amount of goods increase, or less if the amount of goods start to decline. The latter, however, seems unlikely given the ingenuity of the Praxis.