Friday, November 9, 2012

The Yield from Money Held by W. H. HUTT

MY AIM in this essay is to attempt to carry the tenor of Mises’ teaching a step further in the field of monetary theory. A feature of his great contribution, Human Action, is its insistence that all goods and services have the same scarcity significance, i.e., that they all stand in an identical relation to human choice and exchange. It seems to me that money and monetary services ought to be included under this principle, in a manner in which Mises himself has not argued. In this field all economists have shared, I feel, in a hindering tradition which, had the logic of his approach been extended, Mises would have thrown off. I refer to the notion that money is “barren,” “sterile,” “unproductive,” “offering a yield of nil.” This view is held today by economists of all schools. Yet practically without exception they talk of the “services” rendered by money or the “utilties” derived from money. It is in this respect that we find the clearest justification for Wicksell’s confession that in the field of monetary theory, “diametrically opposed arid sometimes self-contradictory views are defended by the most famous writers.”1 To the best of my knowledge the doctrine of the sterility of money has so far been subject to explicit challenge only by T. Greidanus.2 The latter has, however, not yet explained the full significance of his “yield theory.”3
In three articles published since 1952,4 I have discussed an ambiguity in the concept of the “volume of money.” We have to distinguish, I have suggested, between the idea of the aggregate amount of money measured in actual money units, like pounds, dollars, francs, etc., and the aggregate amount of money assets measured in “real terms,” i.e., measured in units of constant value in terms of “things in general.”5 The former, I regard as “containers” of varying amounts of the latter.6
The notion that money has a “yield of nil,” i.e., that it differs from other assets in that it is “dead stock,” persists, I think in part owing to the above-mentioned ambiguity. For one of the usual explanations of this supposed peculiarity of money relies on the fact that an increase in its “quantity” does not mean that there is any increase in “wealth” or “welfare” or “total utility.” But this is true only of the number of money units or “containers” and not of what is contained in them. It is not true of the aggregate amount of money assets measured in real terms. Money so conceived is as productive as all other assets, and productive in exactly the same sense. And the fact that the number of “containers” (units) may be varied whilst the aggregate amount of what is contained in them may remain constant (or vice versa) in no way affects the truth that money assets offer prospective yields just as the rest of the assets possessed by individuals, firms, banks or governments. As objects of investment, they are chosen for the same reason that other objects are chosen. Thus, if their marginal prospective yield at any time is below that of other assets, it will pay to part with some of them, and if it is above, it will pay to acquire money assets up to the point at which the marginal prospective yield has fallen to the rate of interest. Now Mises himself, and several other economists, maintain explicitly that the amount of money which individuals and firms decide to hold is determined by the marginal utility of its services.7 Yet for some reason they have not made the next small step needed to recognize this prospective yield (of “utilities”), which invites the holding of money, as the normal return to investment.
The prospective yield from investment in money assets consists, I suggest, (a) of a prospective pecuniary yield, in which case the money assets are producers’ goods;8 or (b) of a prospective non-pecuniary yield in personal convenience, in which case the money assets are consumers’ capital goods;9 or (c) of a prospective “real,” i.e., non-pecuniary, speculative yield, in which case the assets are producers’ goods, whether held privately or in the course of business. In the case of (a) and (b), the yield is derived in the form of technical monetary services of various kinds, which permit the most economic acquisition of other factors of production or goods for consumption. In the case of (c), the yield is derived in the form of the greater command over non-money assets which a unit of money is expected to have at some later period. As we shall see, these statements are all implied by Mises’ teaching, but never expressed by him in terms of prospective yield. In the following pages, I shall try to support my thesis that it is logically correct, and appropriate from the standpoint of exposition, to refer to the prospective yield or return from the holding of money assets, just as one does from the holding of non-money assets. I shall do so through an examination of the principal arguments which have been used by economists since the earliest times to explain why money has no yield, pecuniary or otherwise.
I am inclined to think that the tradition which I am questioning arose originally through the influence of Locke upon Adam Smith. The latter’s description of “ready money . . . which a dealer is obliged to keep by him unemployed,” as so much “dead stock, which . . . produces nothing either to him or to his country,”10 gave influential emphasis to a bad precedent. Locke had three times used the very same words of money, “produces nothing.” Unlike land, which produces something valuable to mankind, said Locke, “money is a barren thing”; and yet it was, he argued, subject to the same laws of value as other commodities.11
But the idea is ancient. Several writers have attributed it to Aristotle,12 for he condemned usury on the grounds that “the birth of money from money” was “the most unnatural” mode of making money.
Edwin Cannan insisted that it is by no means certain that Aristotle thought money was barren, but merely that he thought it ought to be.13 Wicksteed pointed out that Dante, following Aristotle, emphasized the unnaturalness of money breeding money, by expressly associating usurers with sodomites!14 Bacon (who argued for the toleration of usury) said, “They say that it is against nature for money to beget money,”15 but did not explain whether “they” meant that it was immoral or impossible. Shakespeare, in the same context of the controversy over usury, made Antonio, in The Merchant of Venice, refer to “a breed of barren metal.”16 We can hardly blame Shakespeare for what he made one of his characters say; yet through this passage, Bonar agreed, “a wrong twist” was probably given to Aristotle’s meaning.17 And Bentham, facetiously18 ridiculing what Aristotle was supposed to have held, alleged that the “celebrated heathen” philosopher described money as barren because he “had never been able to discover, in any one piece of money, any organs for generating any other such piece.”19
Now although this discussion of the legitimacy of usury continued to be clouded by the confusion of the concept of money with that of capital (all money is capital, but not all capital is money), it appears to have been responsible for the continuing and still current fallacy that “money does not mulitply itself,” as do other forms of productive capital. And we must, I fear, blame either Locke, whose failure to throw off the ancient and barren notion of “barren metal” thereby perpetuated it, or else Adam Smith, who was too uncritically indebted to Locke (or Aristotle directly) and propagated the insidious fallacy.
Locke’s influence was all the greater by reason of the impressive, rational treatment which he devoted to the role and functions of money. He had a remarkably modern grasp of the tasks which money has to perform.20 Indeed, he perceived clearly what we call today the “institutional” factors determining the demand for money.”21 And most interesting of all, he saw that money had “the nature of land,” the interest on land being but the rent.22 In using these words, he seemed to come very near to stating the very truth for the recognition of which I am now pleading; for, he said, the “income” of land is called “rent” and that of money, “use.” (See page 216) A little later on, however, he apparently remembered Aristotle (or Antonio!) and wrote: “Land produces something new and profitable, and of value to mankind; but money is a barren thing and produces nothing.”23 In part, the confusion here seems to be due to the narrow view of what constitutes productiveness; although, as I have said, the old confusion between the concepts of money and capital seems mainly to blame. He thought of money lent as productive to the lender, but presumably not productive to the borrower. Yet there is similarly no direct pecuniary return from land unless it is hired out to someone else. Does that mean, then, that our land brings us no return, pecuniary or real, when it is not lent? Obviously not. Of course, if one finds that the whole of one’s cash balance is unnecessary (i.e., if some part of the balance offers no speculative or convenience yield valued at above the rate of interest), and one then fails to make other use of the redundant sum, or to lend it to someone who can, the surplus will remain “barren,” just like unutilized land. A trader’s stocks of anything may be wastefully large. There is nothing unique about money in this respect. It was owing to Locke’s failure to make the small further jump necessary, and to state that the productiveness of money does not differ in any material manner from that of land, that we may have the origin of the root fallacy which has confused monetary theory ever since. The subsequent tradition has been to regard money as having “resource value” or capital value, but no “service value.”
Between Locke and Adam Smith, various writers perceived the usefulness of money, e.g., Cantillon and Hume, but they failed to see that “usefulness” is a mere synonym for “productiveness” or “yield.”24
Adam Smith’s contribution on the point, although obviously inspired by that of Locke, differed slightly from it. At times, he regarded money as “the instrument of commerce,”25 but at other times he denied that it was “a tool to work with.”26 “Gold and silver,” he wrote elsewhere, “whether in the form of coin or of plate, are utensils . . . as much as the furniture of the kitchen.”27 But he would not have described furniture as “productive.” This “dead stock,” he said of money, “is a very valuable part of the capital of the country, which produces nothing to the country.”28 His acceptance of such a paradox can probably be explained, as with Locke, by the narrow conception of “productivity” of his day. “The gold and silver money which circulates in any country may,” he said, “very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either.”29 To some extent he was, I think, misled through his desire to refute the fallacies of the Mercantilists. He wanted to show the folly of accumulating money in the belief that it represented “wealth,” and was accordingly led to the assertion that, whilst it “no doubt, makes always a part of the national capital, . . .” it is “always the most unprofitable part of it.”30
It is surprising that, as the eighteenth century view of productivity was abandoned, the essential yield from money assets did not come to receive explicit recognition. But as Greidanus has pointed out, Ricardo failed to recognize that money is needed, not only for payments but to be kept on hand.31 Senior recognized that money was “of the highest utility”32 but contended that its use gave “no pleasure whatever.” He added, “its abundance is a mere inconvenience” because we should have to carry more of it.33 Obviously, he was here thinking of what I have called “money units.”
J. S. Mill’s insight was not very much deeper. He recognized that money assets had a task, he referred to “the quantity of work done” by them, he even spoke of their “efficiency,” and he fully understood that the demand for such assets was a function of the amount of traffic which they facilitated.34 But he confused the notion of “rapidity of circulation” with that of “efficiency.” He did not realize that, certis paribus, if units of money circulated more slowly, that would be due to there being more work, not less work, for them to do. (See below, pp. 213, 214.)
Cairnes (like Adam Smith) was led astray through an attempt at easy refutation of mercantilist ideas.35 He wanted to answer Tooke, who had discussed metallic money as though it were, in itself, a source of productive energy, and who had argued that “an addition to the quantity of money” was “the same thing as an addition to the Fixed Capital of a country”—as equivalent in its effects to “improved harbours, roads and manufactories.”36 But to deny that the acquisition of specie is necessarily a wise form of investment is not to deny that money is instrumental capital. Nor does the fact that it may take a wasteful form (e.g., gold coin, when convertible paper would serve equally well) imply that money assets as such do not provide a flow of valuable services.37
Böhm-Bawerk was surprisingly contented with the naivety of Aristotle, whose argument he summed up as follows: “Money is by nature incapable of bearing fruit.”38 And yet he recognized that interest “may be obtained from any capital, . . . from goods that are barren as well as from those that are naturally fruitful.”39 The explanation of the paradox again appears to lie in the dogged persistence of the crude notion of productiveness, a notion which was responsible for Böhm-Bawerk’s rejection of the “use theories” of interest. He twice quoted the same trenchant passage from Hermann in which it was pointed out that “land, dwellings, tools, books, money, have a durable use value. Their use . . . can be conceived of as a good in itself, and may obtain for itself an exchange value which we call interest.”40 But this repeated quotation was merely for the purpose of refutation. To Böhm-Bawerk, “use” meant “physical” or “material” services only.41 “For any ‘use of goods’ . . . other than their natural material services,” he said, “there is no room,  either in the world of fact, or in the world of logical ideas.”42 It is “theoretically inadmissible to recognise relations as real goods.”43
Von Wieser mentioned various reasons why holdings of ready money were indispensable or speculatively profitable;44 but he thought that the “advantage in value” is only realized by such holdings when the object is ultimately acquired for which the money was accumulated.45 And although he used phrases which at first suggest that he had perceived that money units are useful or necessary for reasons of the same economic nature as other productive assets or durable consumption assets,46 and although he clearly regarded money as part of circulating capital,47 he used his chief concepts in a far from rigorous manner. One can hardly feel that he was visualizing, even dimly, the prospective yield which induces the acquisition of money assets.48
Wicksell accepted explicitly Aristotle’s contention that money is “sterile.”49 It “does not itself enter into the processes of production,” he said.50 Yet, in discussing the various functions of money (e.g., as resources to meet unforeseen disbursements), he discussed also the factors determining its average period of “rest” or “idleness,” notions which suggest that it must have periods of work or activity. He held that money was held “not to be consumed . . . or to he employed in technical production, but to be exchanged for something else. . . .”51 He did not explain why the fact that money is not consumed, or intended to be exchanged for something else, should prevent it from providing continuous services in production.52 But in criticizing Menger for his false distinction between “money on the wing” and “money in hand,” he wrote, “Some money may often lie untouched for years in the till, though it has not, on that account, ceased to serve as a means of circulation.”53 Here, surely, is an admission that money in the till is providing continuous services, that it is not economically idle, or “resting,” and that its usefulness is not concentrated into the moment at which it is spent.54
Marshall referred to the services (without using this word) rendered by holdings of currency, in making business “easy and smooth,”55 and discussed the balancing of the “advantages” of holding resources in this form with the “disadvantages” of putting more of a person’s resources into a form “in which they yield him no direct income or other benefit.”56 But somehow he did not see that he was comparing one “advantage” with another “advantage,” i.e., one end or means with another end or means. It certainly seems that he also was in some measure misled by the realization that a mere increase in the number of money units (pounds, francs, dollars, etc.) does not, in itself, result in an increase in the flow of monetary services. He said, “currency differs from other things in that an increase in its quantity exerts no direct influence on the amount of services it renders.”57 That view, combined with the influence of the “barren money” tradition, appears to account for his insistence that the holding of resources in the form of currency “locks up in a barren form resources that might yield an income of gratification if invested, say, in extra furniture; or a money income if invested in extra machinery or cattle.”58 This contrast of furniture and money (as opposed to Adam Smith’s identification of furniture with money) curiously failed to suggest to him, or his critics and disciples, that he was making a false distinction. Money assets (held as consumers’ capital goods) render non-pecuniary gratifications just like those rendered by furniture.
How much wiser was Edwin Cannan’s insight, in his Modern Currency: “Our need for currency is analagous to our need for houses,” he said.59 And he was, I feel, ahead of his contemporaries in his recognition, from the beginning, that the demand for money is essentially a demand to hold.60 Nevertheless, the passage quoted seems to be inconsistent with what he wrote elsewhere. Thus, in his Money, he wrote at one point in the traditional way, that “people only want money in order to buy other things with it. . . .”61 In reality, people want money so as to be in a position to acquire other things at the most profitable time, or at the most convenient time. Had it been put this way to him Cannan, like anyone else, would have agreed at once.62 As things are, after having recognized that the services of money are analogous to those of a house, he wrote that holdings of money “are not directly productive.”63 People would not diminish their holdings “without reason,” he continued, “because it would, they believe, be inconvenient to have less in hand.” But cash in hand and at the bank does not differ in this respect from any type of stock in trade. The main difference is that, in the case of money stocks, it is easier to rectify any mistaken judgment which has led to surplus stocks (but less easy to rectify any deficiency).
Wicksteed (agreeing with his interpretation of Aristotle) illustrated what he thought was “the exact nature of a circulating medium” as “something which X, when he has given Y something that Y wants, is willing to receive in exchange though he has no use for it himself, because he knows that he can, in his turn, get something that he does want in exchange for it.”64 No article, he contended, which is accepted as a medium of exchange, occupies “on its own merits . . . such a place on (people’s) relative scale as would justify the exchange.”65 But if we had “no use for” money, would we not always part with it immediately we got it, so that the velocity of circulation would be infinite? The fact that we hold money assets for any period at all indicates that, although we do not want to use these assets in any other way, their services do occupy a place on our scale of preferences, just like the services of all the other capital resources which we refrain from exchanging.66
Cassel recognized that “an object in general demand” which develops “spontaneously into a general medium of exchange . . . naturally acquires a new attraction, in virtue of its new property.”67 But he did not represent this “new attraction,” or the “new property,” as a new and additional use (personal or business); and on the next page he employed the words, “merely to be used later for exchange with another commodity.”68
Robertson (Sir Denis H.), in spite of his highly independent and original approach to the question, has never torn himself away from the tradition which regards “idle money” as unproductive. The following passage from the 1947 edition of his delightful textbook is not one of the “little bits of specially dead wood” which he cut out of the 1928 version.
. . . The value of money is (within limits) a measure of the usefulness of any one unit of money to its possessor, but not to society as a whole: while the value of bread is also a measure (within limits) of the social usefulness of any one loaf of bread. And the reason for this peculiarity about money is the fact that nobody generally speaking wants it except for the sake of the control which it gives over other things.69
Again I ask, then why is the velocity of circulation not infinite?
Pigou, in The Veil of Money, refers to the damage which would be inflicted on us if we lost the services of money. It would be just as if roads and railways were destroyed.70 But he similarly insists that money is “only useful because it exchanges for other things,” and he accepts the tradition that “a larger quantity does not, as with other things, carry more satisfaction on its back than a smaller quantity, but the same satisfaction.” Nevertheless, he differs from previous writers (with the exception of Greidanus and the possible exception of Cannan)71 because he makes it clear that by “quantity of money” he means “the number of units of money embodied” in the “instrument” or “institution” of money. (Pigou’s italics.) The mere fact, however, that a particular economic good is capable of being diluted is no proof that it is not useful or productive. Milk does not cease to be useful because its adulteration does not increase its gross usefulness.72
Pigou has recourse also to a metaphor which previous writers have used, namely, that of comparing money to the oil in a machine. He refers to it as a “lubricant.”73 Now a lubricant is always consumed, whereas money assets are economically durable. If we use this metaphor, then, we must regard money assets as the resources which supply a continuous flow of lubrication. The comparison then succeeds in suggesting the continuous yield which money assets offer. But it may still leave the wrong impression that the services of money consist in “circulation.”74
Keynes adopted the Marshallian view of money being resources, but barren resources (although Marshall seems to have been nearer  than Keynes to a perception of the essential productiveness of money assets). Yet the terminology of The General Theory suggests, in itself, an awareness of the continuous services of money assets; for it appears at first to be conferring a definite name upon the yield which is expected to flow from an investment in such assets, namely, “liquidity.”75 Certainly, liquidity is regarded as (a) something valuable and (b) something continuously received or enjoyed. This is implicit in the contention that we want a “reward” for parting with it for any given length of time, and that we shall be “rewarded” for so doing. “The power of disposal” over money assets, said Keynes, although it offers “a potential convenience or security,” and although people are “ready to pay something” (a “liquidity premium”) for this advantage, brings forth, “so to speak, nothing . . . in the shape of output.”76 But if the capital value of my till is £ 100 and the average amount of cash in the till is also £ 100, may they not be expected to make an equal contribution to my output? However, Keynes contended that the liquidity which is provided continuously by money held, and for which people are prepared to pay a premium, represents a yield of nil. The holders of money are envisaged as refusing to part with this yield of nil unless they are paid the rate of interest.77
Keynes built a heavy structure on this thesis that money assets are absolutely sterile. So much is this so, that Greidanus actually contrasts him with Marshall. Greidanus contends that Keynes’ view—first expressed in his Tract—that money has no utility apart from its exchange value, although supported by quotations from Marshall,78 completely overlooked “the advantages of holding currency” which Marshall stressed.79 “The place Marshall would have assigned to the ‘advantages,’ Keynes in his equation allots to the number of consumption units we wish to buy in a certain period.”80 But the fact that Keynes did not realize that his views about the services of money diverged so fundamentally from those of his great teacher is surely due to Marshall’s own exposition reflecting some conceptual confusion.81
Keynes’ acknowledged followers have, as far as I am aware, failed to examine or test this crucial stone in his foundations. Apart from the false impressions created through his having excluded the acquisition of assets which provide liquidity from the concept of “investment,” there remains this notion that money assets differ from other assets in that they do not multiply. For instance, L. Tarshis, in a 1948 exposition of Keynesianism, contends that, against the advantages of liquidity, “the holder of money must set the disadvantage that it does not multiply, that his wealth held in that form does not grow.”82 Of course, it does multiply in the sense that any agent of production provides valuable services which may be embodied into cumulable resources. The services of consumers’ capital goods (including cash balances) are always consumed; but those of producers’ goods (including cash balances) are incorporated into wanted things with exchange value. That is why they are acquired or retained.
Even Mises, who has so clearly perceived and emphasized the essential homogeneity of the scarcity concept, has not yet rejected the traditional view. Money, he says, is “an economic good,”83 but neither a producer’s nor a consumer’s good.84 It is not acquired by people “for employment in their own production activities,”85 and it is “not a part of capital; it produces no fruit.”86 Although “indispensable in our economic order . . . [money] is not a physical component of the social distributive apparatus in the way that account books, prisons, or fire-arms are.”87 Adam Smith said that money was unproductive because it was like a highway.88 But Mises would insist that a highway is productive. Money, he says a little later, does not derive its value from that of its products, like other products, “for no increase in the welfare of the members of a society can result from the availability of an additional quantity of money.”89 Now it is true (as he puts it in his Human Action) that “the services money renders can be neither improved nor impaired by changing the supply of money,”90 for he is here referring to the number of money units. But it is not true that the aggregate stock of all commodities, securities or tokens which can serve the purposes of a medium of exchange and which are demanded for that purpose, does not contribute to “welfare” in proportion to its value. When society decides to use assets to a greater extent for the monetary services which they can perform, that does result in a preferred use of all scarce resources and an increase in “welfare” in that sense. Money assets held provide valuable services (utilities), and they do derive their value from their power to render these services. The fact that some assets held for medium of exchange purposes may have value because they can be used for other purposes also (e.g., a gold coin) does not affect this truth.
It may be objected that, when the assets held are mere tokens, as with currency notes and demand deposits, their value is derived, not from the value of their services, but (a) from their market convertibility into goods in general or (b) from their contractual or legal convertibility into a monetary metal or other currencies. But in the absence of faith in convertibility in some such sense, the assets would be incapable of rendering a medium of exchange services. They could not constitute money. It remains true, then, that we part with non-money goods and services in order to acquire money because we judge that money can render us services; and we hold so much of it as renders services which we value more highly than those rendered by non-money assets.
Far from denying the productiveness of money assets held, however, Mises constantly stresses their “services.” And in a most lucid passage he describes the nature of their productiveness91 (although without using this word). He insists that “what is called storing money is a way of using wealth.”92 One’s holdings of money do not represent “an unintentional remainder,” he says. Their amount “is determined by deliberate demand.”93 Money is “appraised on its own merits, i.e., the services which each man expects from holding cash.”94 And it does not perform its task by circulating, but by being held. Thus, he says: “Money is an element of change, not because it circulates but because it is kept in cash holdings.”95 Indeed “there is no fraction of time in between in which the money is not a part of an individual’s or a firm’s cash holding, but just in ‘circulation’.”96 And although it is true that people are continuously acquiring money in order continuously to part with it, they accumulate it in the first place “in order to be ready for the moment in which a purchase may be accomplished.”97 For this reason, he denies that there is a difference between money and vendible goods.
I get the impression therefore that, in his Human Action, Mises is on the point of saying that it is merely the pecuniary yield which is missing from the private holding of money assets.
H. S. Ellis, in an early work on German Monetary Theory (1934), also comes remarkably near to stating the correct principle—so near, indeed, that it looks almost as though, having prepared for combat, he is unwilling actually to clash with the great weight of authority against him. He certainly appears to be trying to escape the conclusions of his own analysis. Thus, he recognizes the “flow of utilities” from money holdings and says that this flow “appears to the producer indirectly as a plus in quantity of product ascribable to his possessing a perfectly liquid asset and to the consumer as a plus in satisfactions in the form of convenience. . . .”98 Moreover, he realizes that the circulation of money “terminates the flow of services. . . .”99 On all these points, he is well ahead of most writers. Yet at the same time he wants to “preserve the undeniably separate character of monetary services,”100 partly for reasons which I do not follow, but partly because he feels that money assets as such, although providing services or utilities, cannot be properly regarded as part of the aggregate assets of the community. This is so, he says, because it would be double counting, such as would result if one included mortgages or stocks and shares as well as the assets they represent, as part of society’s aggregate capital.101
But to obtain the goods which money is said to “represent,” one must exchange money assets for non-money assets, whereas, if a company is liquidated, the shareholders do not exchange assets, i.e., they do not buy the capital resources of the firm: they receive them without any exchange taking place (in practice after the assets are realized for money). Similarly, if a mortgage is foreclosed, there is no exchange of assets. Money assets do not, then, “represent” in the same sense the assets for which they can be exchanged. They are themselves assets which are just as productive (although in a different way) as those for which they are exchanged.102 To appreciate this, one must try for a moment to forget about the number of units into which these assets are divided and to think of their aggregate amount in real terms.
As far as I know, only one economist has come at all close to an actual enunciation of what I regard as the true theory of the yield of money assets, namely, Greidanus, who has significantly described his theory, “the yield theory.”103 But his contributions on this subject appear to have had little influence upon other economists, whilst his treatment has not brought out explicitly what I conceive to be the full basic truth—the fact that money assets are not only subject to the same laws of value as other scarce things, but are equally productive in all intelligible senses.
Surely the reality is that, although money is always held (except perhaps by misers) with a view to its being ultimately passed on to others, the act of passing it on is merely the culmination of a service (technical or speculative) which it has been rendering to the possessor. Indeed, the transfer itself occupies a mere moment whilst the services which flow from the possession of money are continuous over time. The essence of all these services is availability. In the terminology which I suggested in my Theory of Idle Resources,104 money assets are not unemployed or resting when they are in our pockets, or in our tills, or in our banking accounts, but in pseudo-idleness, like a piano when it is not being played, or a fireman or a fire engine when there are no fires. If it could be shown that there exist various forms of wasteful idleness in money which could be classed as withheld capacity, or which correspond, say, to a trader’s redundant stocks (which, through mismanagement, he fails to realize), we could rightly talk of “idle money,” but not otherwise. And the fact that money units may be held speculatively does not mean that they are not being used. Stocks of goods retained because their sale now would, it is anticipated, realize less than their sale later on, including all such goods in warehouses and shops, are normally105 being used, in the course of the production of “time utilities.” The same applies to money units. When speculatively held, they represent money in use.106
Hence money does not do its work by circulating. The common analogies of “the circulation of the blood,” or “the oil of a machine,” are both bad analogies. Because money units are exchange media, they just happen to change ownership more than other types of assets. If we imagine that the work of money is circulation, then we must conclude that money is always idle; for the transfer of money must be regarded as instantaneous!107 It has been suggested that, if people generally were paid quarterly instead of weekly, the demand for money would increase because more money would “be kept idling about at any one time.”108 That is quite the wrong way of putting it. There would be more work for money units to do,109 more monetary services would be required, and more money would therefore be required. Changes in the average interval between purchases (i.e., changes in the velocity of circulation of money units) do not mean changes in the average period of idleness of those units, but changes in their average period of service to each holder, which is a very different thing.
During an inflation there might appear to be an enormous demand for money assets in the sense that people want them for periods of time which they intend to keep as short as possible. In such circumstances, in spite of a multiplication of transactions, and in spite of increased circulation, the amount of work actually needed from money assets falls off. Each money unit becomes less productive because the real yield in convenience etc., is diminished by a real loss. Certainly, people still want money units “for what they will buy,” but they value them less than ever.110
It may be objected that the nature of money is such that it does do all its work in instantaneous skips from buyer to seller, or from debtor to creditor, or from giver to receiver. The objection may be answered by means of a comparison with a climber’s rope. Can it be said that the rope on which the climber is belayed is of service to him only when he actually loses his grip and dangles on it? Obviously not, for without the security it provides, he would almost certainly not have been attempting that particular climb.111
Some may feel that I am stressing a point which is of verbal rather than of substantial importance. But as Greidanus has pointed out, in the minds of the Keynesians, the failure to recognize the real but non-pecuniary yield enjoyed has led to material fallacies. Once the productiveness of money assets is recognized, the notion that the rate of interest is determined by the demand for and supply of money assets, or the demand for and supply of the services of money assets (“liquidity”), ceases to have meaning. And the modifications of that theory, like the various compromise revisions of Keynes’ theory of interest by his disciples, become equally untenable. For if money assets are demanded, like all other assets, up to the point at which their marginal prospective yield has fallen to the rate of interest, it becomes obvious that the demand for and supply of merely one category of capital assets cannot be held to be the determinants of the ratio between the value of the pure services of assets in general and their capital value, which is the best way of conceiving of the rate of interest. If interest is envisaged (as Keynes regarded it) as the “reward” for not hoarding, it has to be accepted equally as the “reward” for not investing in each and every other productive field. Or, more generally, the “reward” for not investing in any productive field (including that of money assets) is the “average” or “general” return which can be expected from all other fields of investment—allowance made for entrepreneurial remuneration.112
It might be argued that there is one respect in which money assets are different, namely, that their real volume or stock is not determined by their being produced and consumed. That is, whereas services may be embodied into non-money assets for replacement or net accumulation purposes, this is impossible with money (although the number of money units could be affected by the production of any commodity into which such units are contractually or legally convertible—e.g., gold, under the gold standard). The truth is, however, that money is in exactly the same position as certain other non-money assets in this respect. Thus, consider the case of land, in the sense of site. With the growth of population and the expansion of the productive purposes to which land can be put, its aggregate value in real terms will increase. Similarly (and ceteris paribus) the real value of money assets will increase to the same extent under such circumstances.113 But the services of money assets are produced and, like all other services, they are either consumed or embodied into products.
In conclusion, I suggest that if we understand that the demand for money assets is a demand for productive resources, we are in a better position to grasp the nature of the difficult problems which arise owing to (a) uncertainties about the future value of the money unit (in practice, uncertainties about what governments or monetary authorities will do) or (b) (less important and rather less difficult) realized changes in the value of the money unit.

On Freedom and Free Enterprise: Essays in Honor of Ludwig von Mises

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