Economics Dictionary of ArgumentsHome
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| Money supply: Money supply refers to the total amount of money in circulation within an economy at a given time. It includes physical currency, such as coins and notes, along with demand deposits and other liquid assets. Central banks regulate money supply to influence economic conditions and manage inflation. See also Money, Monetarism, Demand for money, Inflation, Central bank._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Milton Friedman on Money Supply - Dictionary of Arguments
Landsburg I 14 Money supply/Friedman/Landsburg: (...) let's imagine a simple world where, as of a particular Monday morning, the populace collectively holds a total of $ 1 million. The government, which has been planning all along to buy $ 1 million worth of paper clips on Monday afternoon, makes the decision to pay for those paper clips with newly printed money (as opposed to using, say, tax revenue or borrowed funds). What should we expect to happen? As of Monday afternoon, the people who sell paper clips are holding more money than they held this morning. In fact, the total money supply has doubled, so if we average this over the entire population, the average person (call her Alice) is now holding twice as much as she held this morning. But that's more than she wants. If she wanted this much money, she would have arranged for it in the first Place (perhaps by depositing a bit more of her paycheque into her chequing account instead of her retirement account). Landsburg I 15 Problem: how is she going to get rid of this excess money? Discarding it seems like an exceptionally bad idea. Maybe she turns to her neighbour Bob and talks him into borrowing one of her dollars. But then Bob has an extra dollar to get rid of. Maybe she goes to the bank and buys a certificate of deposit. But then her banker, Carol, has more money than she wants in her vault. No matter where the money goes, the average person still has twice as much money as he or she did this morning and is still trying to get rid ofit. The other way to get rid of money is to spend it. So sooner or later, Alice (or someone) decides to buy an extra hamburger or an extra haircut or a more expensive sweater - or maybe she schedules a gutter repair she'd been planning to put off till next year. Prices: This bids up the prices of hamburgers, haircuts, sweaters, and home maintenance by, say, 10 percent. Because prices are higher, people are now willing to hold 10 percent more money than they held this morning. Unfortunately, the amount of money floating around has gone up not by 10 percent but by 100 percent. So the process continues until prices are bid up by fully 100 percent. Now people want to hold all the excess money and the process comes to a halt.* The bottom line: - If you double (or triple or quadruple) the money supply, prices will double (or triple or quadruple). The process might take a while, and some interesting stuff can happen along the way. A little reflection reveals a somewhat deeper moral: - A jump in the general level of prices (as opposed to an increase in the price of one specific good or another) is always caused by people trying to get rid of money. >Price level. Landsburg I 16 Why might people want to get rid of money? We've listed some reasons already - a wider acceptance of credit cards, an increase in street crime, a rise in the interest rate, or an increase in the supply of money, leaving people with more than they want to hold. >Inflation/Friedman. Landsburg I 22 Money Supply/Friedman/Landsburg: (…) like many things, inflation in small doses is a little bit bad and inflation in higher doses is extremely bad. But why put up with any badness you don't have to put up with? It seems like the best scenario is no inflation at all - and the recipe to accomplish that scenario is zero growth in the money supply. Landsburg I 23 Question: (…) why not go even further? If Alice enjoys holding 10 weeks' income in the form of money, perhaps she'd be even happier holding 12 weeks' income. Maybe she could use a little nudge in that direction! We could provide that nudge with a negative inflation rate (also called deflation), which causes the money in Alice's pocket to grow over time in value, thus encouraging her to hold more of it. >Inflation, >Inflation/Friedman, >Deflation. Problem: If holding a little extra money makes Alice a little happier, why does she need a nudge? >Nudging. The answer is that when Alice chooses to hold more money—and hence to spend less money- she's helping to keep the price level down, which benefits not just her but (…) countless others. And if they in turn hold more money, then Alice shares in the benefits. As a result, everyone can be better off if everyone gets a little nudge. Negative Inflation/Friedman: So Friedman was led to contemplate a negative inflation rate, driven by a steady reduction in the money supply. (The government could, for example, collect some taxes in cash and burn 10 percent of the proceeds.) Problem: On the other hand, money supply growth has some advantages. Money supply growth/taxation: If the government pays for paper clips with newly minted money, then it doesn't have to pay for paper clips by taxing (say) coffee, and that's good for everyone who buys or sells coffee. Solution/Taxation/Friedman: After weighing this and other factors, Friedman in the end endorsed a small but positive inflation rate on the order of about 2 percent a year, but, believing that 2 percent a year was likely to be politically infeasible, declared himself perfectly willing to settle for as much as 5 percent. Problem: (…) in the short run, the price adjustments take place in fits and starts, which can have important consequences. >Quantity theory. * (…) People try to get rid of money by buying things, which drives up prices until people are willing to hold the extra money after all. You might wonder why we can't tell a different story: Maybe people try to get rid of money by lending it, which drives down interest rates until people are willing to hold the extra money after all. (Remember that when the interest rate is Iow, alternatives to money - like certificates of deposit - are less attractive.) The problem with that story is that it runs afoul of economic theory, which tells us that the interest rate must be fully determined by the supply and demand for current and future goods and services, leaving no room for it to be affected by changes in the supply and demand for money. - - - Brocker I 397 Money Supply/FriedmanVsKeynesianism/Economic Crisis/Friedman: thesis: after the economic crisis of the early 1930s, central banks had not tried hard enough to prevent the collapse of banks. Solution/Friedman: a policy of steady money supply growth as a necessary and sufficient condition of macroeconomic stability, i.e. above all to preserve the value of money. >Monetarism. Peter Spahn, „Milton Friedman, Kapitalismus und Freiheit“, in: Manfred Brocker (Hg.) Geschichte des politischen Denkens. Das 20. Jahrhundert. Frankfurt/M. 2018_____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Econ Fried I Milton Friedman The role of monetary policy 1968 Landsburg I Steven E. Landsburg The Essential Milton Friedman Vancouver: Fraser Institute 2019 Brocker I Manfred Brocker Geschichte des politischen Denkens. Das 20. Jahrhundert Frankfurt/M. 2018 |
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> Counter arguments against Friedman
> Counter arguments in relation to Money Supply
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