3.05. Money Income and Money Expenditures

0:005. Money Income and Money Expenditures In a money economy, each individual sells goods and services that he owns for money, and uses the money to buy desired goods. Each person may make a record of such monetary exchanges for any period of time. Such a record may be called his balance of payments for that period.

0:58Also, he has disposed of an old radio to Mr. Johnson. His account of money received, that is, money purchased for goods and services sold, is as follows. September 1961, James Brown, money purchased for goods and services sold. 20 ounces of gold for labor as carpenter to Jones. 5 ounces of gold for labor as handyman to Jones and Smith, 1 ounce of gold for old radio to Johnson, total 26 ounces of gold. From the account we know that by his sales of goods and services during this period, Brown has purchased 26 ounces of gold.

1:46This total of money purchased is his total of money income for that period. It is clear that the more money income a man receives during any period, the more money he will be able to spend on desired goods, other things being equal, an important qualification that will be examined in later sections. He will strive to earn as much money income in any prospective period as he can. Mr. Brown acquired his income by selling his labor services and a durable consumer's good. There are other ways of acquiring money income on an unhampered market. The owner of land may sell it for agricultural, locational, industrial, as well as other purposes.

2:37The owner of capital goods may sell them to those interested in using them as factors of production. The tangible land and capital goods may be sold for money outright, or the owner may retain ownership of the good while selling ownership of its services over a certain period of time. Since any good is bought only for the services that it can bestow, there is no reason why a certain period of service of a good may not be purchased. This can be done, of course, only where it is technically possible. Thus, the owner of a plot of land or a sewing machine or a house may rent it out for a certain period of time in exchange for money.

3:24While such hire may leave legal ownership of the good in the hands of the landlord, the actual owner of the goods service for that period is the renter or tenant. At the end of the hire period, the good is returned to the original owner, who may use The Theory of Money and Credit

4:13Mr. Green's account of money income for June to December 1961 may be as follows. Money income from sale of goods and services Purchased 28 ounces of gold for rent of land to Mr. Jones 300 ounces of gold for sale of other land to Mr. Forrest 15 ounces of gold for sale of threshing As was seen in the previous chapter, in order first to acquire the good or service that a man can sell for money, he must first either produce it himself, or buy it from someone Man who has produced it, or who in turn has bought it from the original producer.

5:12If he has been given money, the original owner must have acquired it through producing a good, etc. Thus, in the last analysis, the first seller of a capital good or a durable consumer's good is the original producer, and later purchasers must have produced some service of their own in order to obtain the money to acquire it. The seller of labor service, of course, produces the service directly at the time. The seller of pure land must originally have appropriated unused land, which he had found and transformed. On the unhampered market of a money economy, producers of commodities and services sell Money is acquired in this way by all except the producers of the original gold on the market, those who mined and marketed it.

6:16However, the production of the money commodity, as with all other valuable commodities, itself Both requires the use of land, labour and capital goods, and these must be paid for by the use of money. The gold miner then receives no money by gift, but must actively find and produce gold to acquire his money. With the use of money acquired in these various ways, individuals purchase desired goods. They do so in two capacities, as consumers and as producers. As consumers, they purchase consumers' goods that they desire. In the case of durable goods, they may purchase the entire good, or they may hire the services of goods for some specified period of time.

7:08As producers, they use money to purchase the services of factors of production needed to to produce consumers' goods or lower-order capital goods. Some factors they may purchase outright to use all their anticipated future services. Some they may hire for their services for a specified period of time. Thus, they may purchase capital goods that function as raw material. They may purchase some capital goods called machines and hire others. In general, just as consumers cannot very well hire short-lived non-durable goods, so producers cannot very well hire capital goods, dubbed raw material, or inventory, that are used up quickly in the process of production.

8:06On a free market they cannot purchase labor services outright, as was explained in the preceding chapter. Since man's personal will is inalienable, he cannot, in a voluntary society, be compelled to work for another against his present will, and therefore no contracts can be made for purchase of his future will. Number services, therefore, can only be bought for hire on a pay-as-you-go basis. Any individual may draw up an account of his purchases of other goods with money for any period of time. The total amount of money given up in such exchanges is his money expenditures, or money outlays, for that period.

8:55Here it must be noted that his expenditure account, as well as his income account, can be itemized for each transaction, or may be grouped into various classes. Thus, in Brown's account earlier, he might have tabulated his income as 25 ounces from labor in general, and 1 ounce from his radio. How broad or narrow the classes are depends purely on the convenience of the person drawing The total, of course, is always unaffected by the type of classification chosen. Just as money income equaled money purchased for goods and services sold, plus money received as gifts, so money expenditure equals money sold for goods and services bought, plus money given away as gifts.

9:50Thus, Mr. Brown's money expenditure account for September 1961 might be the following. September 1961, James Brown, money expended, money sold for goods and services bought, 12 ounces of gold for food, 6 ounces of gold for clothing, 3 ounces of gold for rent of house, 2 ounces of gold for entertainment, Account Money Given 1 oz. of gold for charity. Total 24 oz. of gold. In this account, Brown is spending money purely as a consumer, and his total money expenditures for the period are 24 oz. If he had desired it, he could have subdivided the account further Here it may be noted that an individual's total money income for any period may be termed his exports, and the goods sold may be termed the goods exported.

11:03On the other hand, his total money expenditure may be termed his imports, and the goods and and services bought are the goods imported. These terms apply to goods purchased by producers or consumers. Now let us observe and compare Mr. Brown's income and expenditure accounts for September 1961. Brown's total money income was 26 ounces of gold, his money expenditures 24 ounces. This must mean that 2 ounces of the 26 earned in this period remained unspent. These two ounces remain in the possession of Mr. Brown and are therefore added to whatever previous stock of gold Brown might have possessed.

11:53If Brown's stock of money on September 1, 1961 was 6 ounces of gold, his stock of money on October 1, 1961 is 8 ounces of gold. The stock of money owned by any person at any Any Point in Time is called his cash holding or cash balance at that time. The two ounces of income remaining unspent on goods and services constituted a net addition to Brown's cash balance over the month of September. For any period, therefore, a person's money income is equal to his money outlay plus his addition to cash balance. If we subdivide this income expenditure account into smaller periods of time, the picture of what is happening to the cash balance within the larger period is likely to be far different from a simple addition of two ounces.

12:53Thus, suppose that all of Brown's money income came in two chunks on the 1st and 15th of September, while his expenditures occurred every day in varying amounts. As a result, his cash balance rose drastically on September 1st, say to 6 plus 13 or a total of 19 ounces. Then the cash balance was gradually drawn down each day until it equaled 6 again on the 15th. Then it rose sharply again to 19, finally being reduced to 8 at the month's end. The pattern of Brown's supplies and demands on the market is clear.

13:38Brown supplied various goods and services on the market and demanded money in exchange. With this money income, he demanded various goods and services on the market and supplied money in exchange. The money must go into the cash balance before it can be spent on goods and services. This is also true if the income is gradual and the expenditure is in discrete sums, or for any other pattern of money, income and expenditures. Suppose, on the other hand, that Brown's expenditures for September had been 29 ounces instead of 24 ounces. This was accomplished by drawing down Brown's previous cash balance Money Income Equals Money Expenditures, Plus Net Additions to Cash Balance, Money Income Income equals money expenditures plus net additions to cash balance minus net subtractions from cash balance.

15:02Alternatively, the term exports can be substituted for income and imports for expenditures in the equation. Let us assume, for purposes of simplification, that the total stock of the money commodity in the community has remained unchanged over the period. This is not an unrealistic assumption, since newly mined gold is small compared to the existing stock. Now it is obvious that like all valuable property, all money must, at any point in time, be owned by someone. At any point in time, the sum of the cash holdings of all individuals is equal to the total stock of money in the community.

15:48Thus, if we consider Brown among a group of five persons living in a village, and their respective cash balances on September 1st were 6, 8, 3, 12 and 5 ounces, then the total stock of money held in the village on that date was 34 ounces. If the data were available, the same sort of summation could be performed for the world as a whole, and the total stock of money discovered. Now it is obvious that Brown's addition of two ounces to his cash balance for September must have been counterbalanced by a subtraction of two ounces from the cash balances of one or more other individuals.

16:36Since the stock of money has not changed, Brown's addition to his cash balance must must have been acquired by drawing down the cash balances of other individuals. Similarly, if Brown had drawn down his cash balance by 3 ounces, this must have been counterbalanced by the addition of 3 ounces to the cash balance of one or more individuals. It is important to recognize that the additions to or subtractions from a cash balance are are all voluntary acts on the part of the individuals concerned. In each period, some individuals decide to add to their cash balances, and others decide to reduce them, and each makes that decision which he believes will benefit him most.

17:28This section is limited to a discussion of expenditures on consumers' goods. A later section will discuss producers' expenditures on producers' goods. It will be seen, however, that even unwelcome losses from cash balances suffered by producers are purely the result of voluntary action that, in a later period, proved erroneous. For centuries, however, fallacious popular usage has asserted that one whose income is greater than expenditures, exports greater than imports, has a favorable balance of trade, While one whose expenditures have been greater than income for a period, imports greater than exports, has suffered an unfavorable balance of trade.

18:20Such a view implies that the active, important part of the balance of payments is the trade part, the exports and imports, and that the changes in the individual's cash balance Changes in cash balance are simply passive balancing factors, serving to keep the total payments always in balance. In other words, it assumes that the individual spends as much as he wants to on goods and services, and that the addition or subtraction from his cash balance appears as an afterthought. On the contrary, changes in cash balance are actively decided upon by each individual in Brown decided to increase his cash balance by two ounces and sold his labor services to obtain the money, foregoing purchases of consumers' goods to the extent of two ounces.

19:18Conversely, in the later example, when he spent three ounces more than he earned in the month, he decided that his cash balance had been excessive and that he would rather spend some of it on consumers' goods and services. There is therefore never a need for anyone to worry about anyone else's balance of payments. A person's unfavorable balance of trade will continue so long as the individual wishes to reduce his cash balance and others are willing to purchase his money for goods. His maximum limit is, of course, the point when his cash balance is reduced to zero. Most likely, however, he will stop reducing his cash balance long before this point.

20:08The assertion has also been made that a person who spends most or all of his income on food and clothing must also have an unfavorable balance of trade, since his money expenditures must be at a certain minimum amount. However, if the man has spent all his cash balance, he can no longer continue to have have an unfavorable balance, regardless of what goods he buys or what his standard of living is.