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Source link: http://archive.mises.org/10774/demand-for-money-and-supply-of-money/

Demand for Money and Supply of Money

October 6, 2009 by

Money is the thing which serves as the generally accepted and commonly used medium of exchange. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function. FULL ARTICLE by Ludwig von Mises


Stephen Grossman October 6, 2009 at 8:00 pm

This article is a naked attempt to ridicule the mainstream media. You should be reported to Obama The Good.

Michael A. Clem October 7, 2009 at 8:59 am

If you can’t manage to read Human Action, the least anyone can do is read it in small sections like this. Mises covers so much in such a short section that it really needs to be read multiple times to make sure you fully understand what it’s saying.
Right here are the reasons why the Real Bills Deal is faulty (supply and demand for money determine money’s purchasing power), and why the quantity theory of money is right but only within a limited context, and not as a general theory.

Rodney October 8, 2009 at 12:48 pm

“But they have favored the spread of fateful errors. They made people confound the notions of money and of capital and believe that increasing the quantity of money could lower the rate of interest lastingly.”

So what Mises is saying, I think — please correct me if I’m wrong! — is that artificially expanding the money supply (inflation) does not signal a “real” change in the price of money (the interest rate). Inflation is a form of price manipulation that does not accurately reflect the true state of affairs. More specifically, the artificial increase in the amount of money does not correspond to an increase in the amount of wealth, of which money is supposed to be representative.

An inflation-induced decrease in the price of money (the interest rate) is really a false signal that artificially stimulates demand. Although the demand for lending capital is not based on economic reality (i.e., on the actual amount of savings available for lending – i.e., “capital”), the demand itself is real and has real economic consequences (e.g., more and riskier loans, malinvestment, squandered resources, etc.).

Inflation, the artificial demand it stimulates, and the pervasive entrepreneural errors it induces all coalesce in a simulation of the market economy that is coterminous with, and almost indistinguishable from, the actual market economy, which appears to be growing. That this growth isn’t real — since production is not responding to genuine consumer demand that would sustain it — does not dawn on people until the bubble bursts and business investors realize that the resources they were counting on to finish all the long-term projects they started simply do not exist. So begins the recession – the time during which the real economy shakes off the accretions of fictitious wealth and malinvestments.

Off course, Mises doesn’t say all of this here; I’m just trying to fit what I think he’s saying here with my (however incomplete) understanding of the Austrian theory of the business cycle, which Mises pioneered. I think my interpretation of what Mises is saying here hinges on whether I understand the difference between “money” and “capital.” I’m not sure I do, so please correct me if I’m wrong.

Gerry Flaychy October 12, 2009 at 8:20 pm

To Rodney.
When you think ‘capital’, think ‘balance sheet’:

assets – liabilities = capital .

Capital is a net sum, wich sum is expressed in a unit of measure wich is the unit of money.
It is not the money itself, not the ‘cash’.

Note that in the assets, you can have a part of it which is cash, i.e. paper notes and coins.

Note too that money can be in the form of ‘account-money’, i.e. cash balance in your bank account.

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