Economics Dictionary of ArgumentsHome
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| Demand for money: Demand for money in economics refers to the desire of individuals and institutions to hold cash or liquid assets for transactions, precautionary needs, and speculative purposes. It's influenced by interest rates, inflation expectations, economic stability, and convenience. The demand for money reflects the balance between holding wealth in cash versus other interest-bearing assets. See also Demand, Money, Markets, Interest rates, Inflation, Consumption._____________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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Murray N. Rothbard on Demand for Money - Dictionary of Arguments
Rothbard II 166 Demand for money/prices/Rothbard: (…) partial ‘real’ factors - such as government expenditures abroad, a sudden scarcity of food, or ‘a sudden diminution of the confidence of foreigners, in consequence of any great national disaster’ - could influence overall prices or the status of the pound in the foreign exchange market. But (…) such influences can only be trivial and temporary. The overriding causes of such price or exchange movements - not just in some remote ‘long run’ but a all times except temporary deviations - are monetary changes in the supply of and demand for money. Changes in ‘real’ factors can only have an important impact on exchange rates and general prices by altering the composition and the height of the demand for money on the market. But since market demands for money are neither homogeneous nor uniform nor do they ever change Rothbard II 167 equiproportionately, real changes will almost always have an impact on the demand for money. Salerno: ... since real disturbances are invariably attended by ‘distribution effects’, i.e. gains and losses of income and wealth by the affected market participants, it is most improbable that initially nonmonetary disturbances would not ultimately entail relative changes in the various national demands for money...[U]nder inconvertible conditions, the relative changes in the demands for the various national currencies, their quantities remaining unchanged, would be reflected in their long-run appreciation or depreciation on the foreign exchange market.(1) >Price theory/Rothbard. Rothbard III 756 Demand for money/Rothbard: The total demand for money on the market consists of two parts: Exchange demand: the exchange demand for money (by sellers of all other goods that wish to purchase money) and Reservation demand: 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 (…). In contrast to other commodities, everyone on the market has both an exchange demand and a reservation demand for money. A. Exchange Demand Exchange demand: 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. >Production factors, >Income, >Goods, >Production. Demand: Aside from speculative considerations, the seller of ready-made goods will tend, (…) to have a perfectly inelastic (vertical) supply curve, since he has no reservation uses for the good. Rothbard III 757 Supply: But the supply curve of a good for money is equivalent to a (partial) demand curve for money in terms of the good to be supplied. Exchange demand: Therefore, the (exchange) demand curves for money in terms of land, capital goods, and consumers' goods will tend to be perfectly inelastic. >Elasticity/Rothbard. Labour: Some people might work a greater number of hours because they have a greater monetary inducement to sacrifice leisure for labor. Others may decide that the increased income permits them to sacrifice some money and take some of the increased earnings in greater leisure. In both cases, the man earns more money at the higher wage rate.(…) Therefore, a man’s backward-sloping supply curve will never be “backward” enough to make him earn less money at higher wage rates. Rothbard III 758 „Buying money“/market: Thus, a man will always earn more money at a higher wage rate, less money at a Iower. 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. Demand schedule for money: We are now attempting to arrive at the demand schedule for money in relation to various alternative purchasing powers or "exchange-values" of money. Exchange value of money: A Iower exchange-value of money is equivalent to higher goods-prices in terms of money. Conversely, a higher exchange-value of money is equivalent to Iower prices of goods. Labour/wages: In the labor market, a higher exchange-value of money is translated into Iower wage rates, and a Iower exchange-value of money into higher wage rates. Labour market: Hence, on the labor market, our law may be translated into the following terms: The higher the exchange-value of money, the Iower the quantity of money demanded; the Iower the exchange-value of money, the higher the quantity of money demanded (i.e., the Iower the wage rate, the less money earned; the higher the wage rate, the more money earned). Therefore, on the labor market, the demand-for-money schedule is not vertical, but falling, when the exchange-value of money increases, as in the case of any demand curve. Exchange demand for money: Adding the vertical demand curves for money in the other exchange markets to the falling demand curve in the labor market, we arrive at a falling exchange-demand curve for money. B. Reservation Demand Reservation demand: 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, between the allocation of his money assets in three directions: a) consumption spending, b) investment spending, and c) addition to his cash balance ("net hoarding"). Furthermore, 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. >Cash balance/Rothbard. Reservation demand curve for money: (…) the higher the PPM (purchasing power of money; the exchange-value of money), the lower the quantity of money demanded in the cash balance. >Purchasing power/Rothbard. As a result, the reservation demand curve for money in the cash balance falls as the exchange-value of money increases. This falling demand curve, added to the falling exchange-demand curve for money, yields the market's total demand curvefor money - also falling in the familiar fashion for every commodity. Rothbard III 762 Equilibirum/purchasing power: Suppose (…) that the PPM (purchasing power of money) is slightly higher (…). The demand for money at that point will be less than the stock. People will become unwilling to hold money at that exchange-value and will be anxious to sell it for other goods. These sales will raise the prices of goods and Iower the PPM, until the equilibrium point is reached. On the other hand, suppose that the PPM is Iower (…). In that case, more people will demand money, in exchange or in reservation, than there is money stock available. The consequent excess of demand over supply will raise the PPM again (…). >Purchasing power parity/Rothbard. Rothbard III 766 Economic law: Every supply of money is always utilized to its maximum extent, and hence no social utility can be conferred by increasing the supply of money. >Money supply/Rothbard, >Money supply/David Hume. Economists have attempted mechanically to reduce the demand for money to various sources(2) RothbardVsKeynes: There is no such mechanical determination, however. Each individual decides for himself by his own standards his whole demand for cash balances, and we can only trace various influences which different catallactic events may have had on demand. >Speculative Demand, >Clearing/Rothbard. Rothbard III 772 Demand for money/Rothbard: Is the demand for money unlimited? A popular fallacy rejects the concept of "demand for money" because it is allegedly always unlimited. This idea misconceives the very nature of demand and confuses money with wealth or income. the form of holding back the good from being sold. (…) effective demand for money is not and cannot be unlimited; it is limited by the appraised value of the goods a person can sell in exchange and by the amount of that money which the individual wants to spend on goods rather than keep in his cash balance. Purchasing power: Furthermore, it is, of course, not "money" per se that he wants and demands, but money for its purchasing power, or "real" money, money in some way expressed in terms of what it will purchase. (This purchasing power of money (…) cannot be measured.) >Time preference/Rothbard, >Price/Rothbard. Rothbard III 775 Value of cash balances: The only necessary result (…) of a change in the demand-for-money schedule is precisely a change in the same direction of the proportion of total cash balances to total money income and in the real value of cash balances. Given the stock of money, an increased scramble for cash will simply Iower money incomes until the desired increase in real cash balances has been attained. If the demand for money falls, the reverse movement occurs. The desire to reduce cash balances causes an increase in money income. Total cash remains the same, but its proportion to incomes, as well as its real value, declines.(3) 1. Joseph Salerno. 1980. ‘The Doctrinal Antecedents of the Monetary Approach to the Balance of Payments’ (doctoral dissertation, Rutgers University, 1980), pp. 299-300. 2. J.M. Keynes’ Treatise on Money (New York: Harcourt, Brace, 1930) is a classic example of this type of analysis. 3. Strictly, the ceteris paribus condition will tend to be violated. An increased demand for money tends to Iower money prices and will therefore Iower money costs of gold mining. This will stimulate gold mining production until the interest return on mining is again the same as in other industries. Thus, the increased demand for money will also call forth new money to meet the demand. A decreased demand for money will raise money costs of gold mining and at least Iower the rate of new production. It will not actually decrease the total money stock unless the new production rate falls below the wear-and-tear rate. Cf. Jacques Rueff, "The Fallacies of Lord Keynes' General Theory" in Henry Hazlitt, ed., The Critics ofKeynesian Economics (Princeton, N.J.: D. Van Nostrand, 1960), pp. 238-63._____________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. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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