In the past two or three months I have been reading Austrian economics as a past time. My latest book in "America's Great Depression", buy Murray Rothbard. While reading his first chapter, I was greatly confused about how he talked concerning the Supply and Demand of money. (If someone could provide a detailed explanation of the "Demand" for money, I will be greatly appreciated.
Anyways, on page 7 (2000 ed), he speaks "The demand for money is, in the final analysis, the willingness of people to hold cash balances, and this can be expressed as eagerness to acquire money in exchange, and as eagerness to retain money in cash balance....Demand for money will tend to be lower when the purchasing power of the money-unit is higher, for then each dollar is more effective in cash balance."
In what has government done with our money (45) he says
"Now suppose, for whatever reason, perhaps growing apprehensively, people's demand for cash balances increase....with people valuing cash balances more highly, the demand for money increases, and prices fall. "
I understand that an increase/decrease in the supply of money is simply the stock, but the demand has me confused. Either I am misunderstanding something, or Rothbard is contradicting himself in saying demand for cash balances creates lower prices, and a lower demand for money exists in low prices? Is a demand for cash balances and a demand for money the same thing? I'm terribly perplexed by Rothbard's quotes, and the overall money demand thing. An explanation/graphs would be extremely appreciated.
Finally on page 27 of Great Depression, Rothbard says
"Professor Mises, while recognizing the superiror economic merits of 100 percent gold money to free banking, prefers the latter because 100 percent reserves would conceded to the government control over banking, and government could easily change these requirements to conform its inflationalist bias".
However, I read somewhere in Money, Bank Credit, and Economic Cycles, that Mises considered free banking "second best". Which is it? Did Mises honestly not support 100% reserves because he thought that government control over property rights was too much?
I'm a little worried about these contradictions (if they really are, or my mind is just screwing with me). Any help would be grealty appreciated. Thanks alot.
We keep money in our possession because we intend to buy things with them. If the price of the things we intend to buy falls, it follows that we no longer need to keep as much money in our possession. We can instead invest it in productive assets and buy stocks or savings deposits.
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I recommend reading Chapters II-V of Rothbard's Mystery of Banking. He describes the relationship between the demand and supply of money, and what that means for prices in the economy. It is available at mises.org here: http://mises.org/Books/mysteryofbanking.pdf .
BlackNumero: Finally on page 27 of Great Depression, Rothbard says "Professor Mises, while recognizing the superiror economic merits of 100 percent gold money to free banking, prefers the latter because 100 percent reserves would conceded to the government control over banking, and government could easily change these requirements to conform its inflationalist bias". However, I read somewhere in Money, Bank Credit, and Economic Cycles, that Mises considered free banking "second best". Which is it? Did Mises honestly not support 100% reserves because he thought that government control over property rights was too much? I'm a little worried about these contradictions (if they really are, or my mind is just screwing with me). Any help would be grealty appreciated. Thanks alot.
In both quotes Mises desires 100% reserves, but rejects government as a means to achieve them. He simply feels that the market, and not the legal system, will regulate banks best. He was like all us anarchists in that regard.
I really second the Mystery of Banking, it gives a very easy to understand explanation of money's supply and demand.
Don't know about Mises though.
Thanks alot for you responses guys. I do plan on getting The Mystery of Banking for Christmas.
Can anyone explain Rothbard's supply and demand money for me fairly quickly? I just need to know what an increase in "Demand of money is", and how to make sense of it in Rothbard's passages. Again, thanks.
Ok here goes. It's not particularly easy to do so succinctly, but I'll give it a try!
Money has a supply and demand just like any other good. Let's look at another good first. Take horses. (I lhappen to like horses!)
1) Let's say the total number of horses in existence at a particular time is 1 million. That's the total STOCK.
2) Not every horse is for sale, though. Let's say 10,000 horses are for sale on the market. That's the SUPPLY.
3) The other 900,000 are being retained by their owners for their use as horses; to ride or whatever. That's the RESERVATION DEMAND (or the demand to hold)
4) Thus, STOCK minus RESERVATION DEMAND equals SUPPLY.
5) The total amount of money offered in exchange for horses is the EXCHANGE DEMAND.
6) The price of horses is determined by the SUPPLY and the EXCHANGE DEMAND. Prices of horses will go up if the SUPPLY decreases, or the EXCHANGE DEMAND increases. It follows from the above that the SUPPLY decreases if the STOCK decreases or the RESERVATION DEMAND increases.
7) The TOTAL DEMAND is the EXCHANGE DEMAND plus the RESERVATION DEMAND.
8) Hence we can also say that the price of horses is determined by the STOCK and the TOTAL DEMAND. It's the same thing. Prices of horses will go up if the STOCK decreases or the TOTAL DEMAND increases. The TOTAL DEMAND increases if the EXCHANGE DEMAND increases or the RESERVATION DEMAND increases.
Still with me? Now let's look at money:
1) The total amount of money in existence at a particular time is the money STOCK. (Depending on your understanding of what money is, it's M1, M2, MZM , ASM etc. I won't get into which is correct because that's a seperate discussion.) All the money in existence, the STOCK, must reside in someone's account. Money does not circulate, contrary to what mainstream economists might say.
2) Not all of that money is for sale, though. What is money for sale? It's all the money that's being offered on the market for goods and services . This is the SUPPLY of money. (Very important note: you'll often hear the word money supply being used synonymously with money stock, but strictly speaking this is inaccurate. Here I'm using the word SUPPLY as the amount of money being offered for exchange) It's very difficult to quantify this because we don't bid on everything we buy in the marketplace, but imagine if everything for sale were auctioned off. The total amount of money bid would be the SUPPLY.
3) What about all the money that's not being offered in exchange? That's the RESERVATION DEMAND for money (or demand for money to hold). Is this money being used? Yes, yes, yes. It is not lying idle. It serves a very important function, and that function is to relieve uncertainty. Life is uncertain and we need a cash balance on hand to buy goods at a moment's notice.
4) The total STOCK of money minus the RESERVATION DEMAND for money equals the SUPPLY of money.
5) The total amount of goods and services offered in exchange for money is the EXCHANGE DEAMND for money.
6) The price of money, which is the same thing as its purchasing power, is determined by the SUPPLY of money available for exchange and the EXCHANGE DEMAND for money. The purchasing power of money will go up if the SUPPLY of money decreases, or the EXCHANGE DEMAND for money increases. It follows from the above that the SUPPLY of money decreases if the STOCK of money decreases or the RESERVATION DEMAND for money increases.
7) The TOTAL DEMAND for money is the EXCHANGE DEMAND for money plus the RESERVATION DEMAND for money.
8) Hence we can also say that the purchasing power of money is determined by the STOCK and the TOTAL DEMAND. It's the same thing. Purchasing power will go up if the STOCK decreases or the TOTAL DEMAND increases. The TOTAL DEMAND increases if the EXCHANGE DEMAND increases or the RESERVATION DEMAND increases.
Nearly finished! Linking the two halves of the above discussion together we can say the following:
a) The EXCHANGE DEMAND for all goods is equal to the SUPPLY of money offered for exchange, which is determined by the STOCK of all money and the RESERVATION DEMAND for all money.
b) Thus the determinates of prices in general are the STOCK of all goods, the RESERVATION DEMAND for all goods, the STOCK of all money and the RESERVATION DEMAND for all money.
or we can say:
a) The EXCHANGE DEMAND for all money is equal to the SUPPLY of all goods for exchange, which is determined by the STOCK of all goods and the RESERVATION DEMAND for all goods.
b) Thus the determinates of the purchasing power of money are the STOCK of all money, the RESERVATION DEMAND for all money, the STOCK of all goods and the RESERVATION DEMAND for all goods.
Phew!
Thanks alot, I appreciate it. Clears some things up.
BlackNumero:I just need to know what an increase in "Demand of money is", and how to make sense of it in Rothbard's passages.
Without having read Rothbard beyond what you have presented, I would interpret 'demand of money' as 'desire to save' as in people save (have demand of money) when prices are high and spend (lack demand of money) when prices are low.
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