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Source link: http://archive.mises.org/10979/the-fallacy-of-the-superneutrality-of-money/

The Fallacy of the (Super)Neutrality of Money

November 5, 2009 by

A rise or fall of the money supply does not confer a social benefit: it merely lowers or raises the exchange value of the money unit. And a change in the money supply also implies redistributive effects. FULL ARTICLE by Thorsten Polleit

{ 9 comments }

billwald November 5, 2009 at 12:11 pm

” ‘Money’ is a medium of exchange,” OK, exactly what does that mean? Money is a convenient method of comparing the relative value of . . . apples and oranges. As we were taught in grade school, “We can add apples to oranges.” Money is a formula of adding apples and oranges, comparing work hours and consumer goods, of comparing Porsches and Volkswagens in the same way that we use a formula to compare quarts and liters. Money is a ratio that compares dissimilar quantities.

Money is NOT a “good” that can be consumed unless one is in a prison camp where cigarettes are the medium of exchange. A chunk of gold has no intrinsic value except as a door stop or similar use. It must be converted to jewelry or whatever to be of use.

Money is a “good” only in the same sense that TNT is a “good,” something like a ciggy butt. One must destroy it to use it. In truth, money is an accounting fiction.

Of course, people and countries use money as a threat in the same way that countries and people use TNT as a threat. Maybe money should be classified as a weapon. weapons.

Michael A. Clem November 5, 2009 at 12:20 pm

Gimme a break, Bill! “Money is a medium of exchange” means that instead of barter, you use some other good for indirect exchange. And money is a good, if only for its value for exchange. But as Mises and others point out, money could not arise if the good didn’t already have market value for non-monetary purposes. You act like you’ve never read anything on the Mises blog before. Are you just playing troll, or doing a bad job of playing devil’s advocate?

greg November 5, 2009 at 12:35 pm

A rise in the money supply doen’t make us richer. You must understand that a decrease or a constant rate doesn’t make us richer either. What makes us richer is an increase in productivity and if your goal is to have a stable currency, then adjustments must be made in the supply to offset the increases in productivity. Or wages would have to be reduced, which isn’t going to happen.

Our society is driven more by Moore’s Law than changes in the money supply. Moore, a founder of Intel stated that the capacity of the computer chip will double every two years. The impact of this law has made posible productivity gains that have never been matched in the past.

Look at the productivity numbers relased today and you can see the impact in the face of huge increases in the money supply.

And while gold is increasing, its receint gains are the result of purchases by India. Of course, they wear more gold than you can find at a Mr. T family reunion. But I am still not seeing increases in commodity prices at both the producer and consumer levels. And the reason for this is PRODUCTIVITY.

Robert November 5, 2009 at 8:49 pm

Thorsten,

Perhaps you (or anyone else for that matter) can clarify something for me.

You said that the Austrian view of money is that it is not neutral. The conventional macroeconomic view is that money is neutral.

You provided some charts that show no relation at all between the money supply, and changes in the money supply, with overall economic growth. This suggests that money is indeed neutral.

How can you then conclude that the Austrian view of no neutrality is vindicated? Do these graphs not show evidence that money is indeed neutral because increases in the money supply had no appreciable effects on GDP?

Thanks in advance.

Lysander November 6, 2009 at 12:17 am

The lack of neutrality of money is marked not by the “final” state of the economy after money is injected into it, but by the transitional states.

The new money stimulates the economy at the junctures at which it first enters it. If it is borrowed into existence to take out a margin loan, then it will elevate asset-values targeted by the loan. If it is for the purpose of business-expansion, then it will bid up prices at the business’s suppliers. If it is created by the Fed for the purpose of adding to its balance sheet, then it will tend to lift the prices of the securities added. The price-rises ripple through the economy, affecting the most remote sectors last.

Money which is borrowed into existence also depresses the rate of interest. Projects are started which would not have seemed profitable if the rate of interest had not been artificially depressed. Moreover, they will turn out to be unprofitable even at the lower rate of interest, since that rate of interest is too low to attract the level of real savings which would have supported the future consumption which the projects rely on. Moreover, the distortion in relative prices due to the entry of newly created money also sends false price signals which undermine profitability.

Such is the result of funding investment not by real savings, but by what amounts to a hidden tax on cash holdings. The “hidden tax” is far from neutral, hurting first and most the businesses which are at the cutting edge of the economy.

R Whitbread November 16, 2009 at 12:03 am

I have been reading a few newsletters from Mises for a while and tend to agree with most of the Austrian ideas. What I wonder is if this theory is as good as claimed, why don’t libertarians get together and create a place somewhere they can practice this theory and show everyone how well it works? Maybe others would follow if it loked that good.
Regards

Elyza April 12, 2011 at 2:15 pm

Walking in the peresenc of giants here. Cool thinking all around!

T. Ralph Kays November 16, 2009 at 12:27 am

R Whitbread

A few attempts have been made, the major drawback being finding a place not claimed by an already existing oppressive government. I remember an attempt to claim some low lying rocks in the south pacific that turned out badly. They were unclaimed because at high tide they were submerged, so some guys took a boat out, piled rocks up till they were above water at high tide and declared a new nation. Eventually the local island nation in the area got wind of it and sent a few boat loads of thugs out to beat them up and remove them. My understanding is that they all ended up in the hospital.

James February 17, 2011 at 2:18 am

There is a request in the article for a free-market currency. I presume that this means a currency controlled by the holders of stuff, most likely gold, because they can have it minted into money.

It occurs to me that we currently have, with fractional-reserve banking, something rather like a commodity currency controlled by debtors; if I hold a stream of future payments, then I can turn it into new money now.

I also think that the word “action” is doing a lot of work, in the axiom of human action, and I wonder whether someone’s thrashing while having a fit, for example, constitutes “action”.

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