11.02. The Money Relation: The Demand for and the Supply of Money

0:002. The Money Relation, The Demand For and the Supply of Money Money is a commodity that serves as a general medium of exchange. Its exchanges therefore permeate the economic system. Like all commodities, it has a market demand and a market supply, although its special situation lends it many unique features. We saw in Chapter 4 that its price has no unique expression on the market. Other commodities are all expressible in terms of units of money, and therefore have uniquely identifiable prices. The money commodity, however, can be expressed only by an array of all the other commodities, that is, all the goods and services that money can buy on the market.

0:56This array has no uniquely expressible unit, and as we shall see, changes in the array cannot be measured. Yet the concept of the price or the value of money or the purchasing power of the monetary unit is no less real and important for all that. It simply must be borne in mind that, as we saw in Chapter 4, there is no single price This exchange value of money also takes on peculiar importance because unlike other commodities, the prime purpose of the money commodity is to be exchanged, now or in the future, for directly consumable or productive commodities.

1:53The total demand for money on the market consists of two parts, the exchange demand for money by sellers of all other goods that wish to purchase money, and the reservation demand for money, the demand for money to hold by those who already hold it. Because money is a commodity that permeates the market and is continually being supplied and Demanded by Everyone, and because the proportion which the existing stock of money bears to new production is high, it will be convenient to analyze the supply of and the demand for money in terms of the total demand stock analysis set forth in Chapter 2.

2:41In contrast to other commodities, everyone on the market has both an exchange demand and a reservation demand for money. The exchange demand is his pre-income demand. As a seller of labor, land, capital goods or consumers' goods, he must supply these goods and demand money in exchange to obtain a money income. Therefore, the exchange demand for money in terms of land, capital goods and consumers' will tend to be perfectly inelastic. For labor services, the situation is more complicated. Labor, as we have seen, does have a reserved use, satisfying leisure.

3:30In determining labor's demand for money, however, we can be far more certain. To understand why, let us take a hypothetical example. At a wage rate of 5 gold grains an hour, 40 hours per week of labor service will be sold. Now suppose that the wage rate is raised to 8 gold grains an hour. Some people might work a greater number of hours because they have a greater monetary inducement to sacrifice leisure for labor. They might work 50 hours per week. Employers may decide that the increased income permits them to sacrifice some money and take some of the increased earnings in greater leisure.

4:16They might work 30 hours. Both would have one thing in common. Let us multiply hours by wage rate in each case to arrive at the total money income of the laborers in the various situations. In the original case, a laborer earned 40 times 5 or 200 gold grains per week. The man working 30 hours will earn 30 times 8 or 240 gold grains a week. The man working 50 hours will earn 50 times 8 or 400 gold grains per week. In both cases, the man earns more money at the higher wage rate.

5:03This will always be true. In the first case it is obvious, for the higher wage rate induces the man to sell more labor. But it is true in the latter case as well, for the higher money income permits a man to gratify his desires for more leisure as well, precisely because he is getting an increased First Money Income Thus a man will always earn more money at a higher wage rate, less money at a lower. But what is earning money but another name for buying money? And that is precisely what is done. People buy money by selling goods and services that they possess or can create.

5:50We are now attempting to arrive at the demand schedule for money in relation to various alternative purchasing powers or exchange values of money. A lower exchange value of money is equivalent to higher goods prices in terms of money. Conversely, a higher exchange value of money is equivalent to lower prices of goods. In the labor market, a higher exchange value of money is translated into lower wage rates, and a lower exchange value of money into higher wage rates. Hence on the labor market, our law may be translated into the following terms.

6:37The higher the exchange value of money, the lower the quantity of money demanded. The lower the exchange value of money, the higher the quantity of money demanded. That is, the lower the wage rate, the less money earned. The higher the wage rate, the more money earned. More important, because more volatile, in the total demand for money on the market is the reservation demand to hold money. This is everyone's post-income demand. After everyone has acquired his income, he must decide, as we have seen, between the allocation of his money assets in three directions, consumption spending, investment spending, and addition to his cash balance, net hoarding.

7:30Furthermore, he has the additional choice of subtraction from his cash balance, net Dishoarding. How much he decides to retain in his cash balance is uniquely determined by the marginal utility of money in his cash balance on his value scale. Until now we have discussed at length the sources of the utilities and demands for consumers goods and for producers goods. We have now to look at The Remaining Good, Money in the Cash Balance, Its Utility and Demand Let us suppose that a man's marginal utilities are such that he wishes to have 10 ounces of money held in his cash balance over a certain period.

8:21Suppose now that the exchange value of money, that is, the purchasing power of a monetary unit, increases, other things being equal. This means that his 10 gold ounces accomplish more work than they did before the change in the PPM, purchasing power of the monetary unit. As a consequence, he will tend to remove part of the 10 ounces from his cash balance and spend it on goods, the prices of which have now fallen. Therefore, the higher the PPM, the exchange value of money, the lower the quantity of Money Demanded in the Cash Balance. Conversely, a lower PPM will mean that the previous cash balance is worth less in real terms than it was before, while the higher prices of goods discourage their purchase. As a result, the lower the PPM, the higher the quantity of money demanded in the cash balance.

9:25There is a third demand for the money commodity that deserves mention. This is the demand for non-monetary uses of the monetary metal. This will be relatively unimportant in the advanced monetary economy, but it will exist, nevertheless. In the case of gold, this will mean either uses in consumption, as for ornaments, or productive uses, as for industrial purposes. At any rate, this demand also falls as the PPM increases. As the price of money, PPM, increases, more goods can be obtained through expenditure of a unit of money. As a result, the opportunity cost in using gold for non-monetary purposes increases, and less is demanded for that purpose.

10:18Conversely, as the PPM falls, there is more incentive to use gold for its direct use. From this point on, this non-monetary demand is included for convenience in the total demand for money. At any one time, there is a given total stock of the money commodity. This stock will, at any time, be owned by someone. It is therefore dangerously misleading to adopt the custom of American economists since Irving Fisher's day of treating money as somehow circulating, or worse still, as divided into circulating money and idle money.

11:05This concept conjures up the image of the former as moving somewhere at all times, while the latter sits idly in hordes. This is a grave error. There is actually no such thing as circulation, and there is no mysterious arena where money moves. At any one time, all the money is owned by someone, that is, rests in someone's cash balance. Whatever the stock of money, therefore, people's actions must bring it into accord with the The Total Demand for Money to Hold, that is, the total demand for money that we have just discussed. For even pre-income money acquired in exchange must be held at least momentarily in one's cash balance before being transferred to someone else's balance.

12:01All total demand is therefore to hold, and this is in accord with our analysis of total Total Demand in Chapter 2. Total stock must therefore be brought into agreement on the market with the total quantity of money demanded.