4. Utility of the Stock of Money
In the case of consumers' goods, we do not go behind their subjective utilities on people's
value scales to investigate why they were preferred. Economics must stop once the ranking
has been made. In the case of money, however, we are confronted with a different problem.
For the utility of money, setting aside the non-monetary use of the money commodity, depends
solely on its prospective use as the general medium of exchange, hence the subjective utility
of money is dependent on the objective exchange value of money, and we must pursue our analysis
of the demand for money further than would otherwise be required.
For other goods, demand in the market is a means of routing commodities into the hands
of their consumers.
For money, on the other hand, the price of money is precisely the variable on which the
demand schedule depends, and to which almost the whole of the demand for money is keyed.
To put it in another way, without a price, or an objective exchange value, any other
Other good would be snapped up as a welcome free gift, but money without a price would
not be used at all, since its entire use consists in its command of other goods on the market.
The sole use of money is to be exchanged for goods, and if it had no price and therefore
no exchange value, it could not be exchanged and would no longer be used.
We are now on the threshold of a great economic law, a truth that can hardly be overemphasized
considering the harm its neglect has caused throughout history.
An increase in the supply of a producer's good increases, Ceteris Paribus, the supply
of a consumer's good.
An increase in the supply of a consumer's good, when there has been no decrease in the
Money, on the contrary, is solely useful for exchange purposes.
Money per se cannot be consumed and cannot be used directly as a producer's good in
the productive process.
Money per se is therefore unproductive, it is dead stock and produces nothing.
Land or capital is always in the form of some specific good, some specific productive instrument.
Money always remains in someone's cash balance.
Goods are useful and scarce, and any increment in goods is a social benefit.
That money is useful not directly, but only in exchanges.
And we have just seen that as the stock of money in society changes, the objective exchange
value of money changes inversely, though not necessarily proportionally, until the money
relation is again in equilibrium.
When there is less money, the exchange value of the monetary unit rises.
When there is more money, the exchange value of the monetary unit falls.
We conclude that there is no such thing as too little or too much money, that whatever
the social money stock, the benefits of money are always utilized to the maximum extent.
An increase in the supply of money confers no social benefit whatever.
It simply benefits some at the expense of others, as will be detailed further.
Similarly, a decrease in the money stock involves no social loss, for money is used only for
its purchasing power in exchange, and an increase in the money stock simply dilutes the purchasing
power of each monetary unit.
Conversely, a fall in the money stock increases the purchasing power of each unit.
David Hume's famous example provides a highly oversimplified view of the effect of changes
in the stock of money, but in the present context it is a valid illustration of the
absurdity of the belief that an increased money supply can confer a social benefit or
relieve any economic scarcity.
Consider the magical situation where every man awakens one morning to find that his monetary
assets have doubled.
Has the wealth or the real income of society doubled?
Certainly not.
In fact, the real income, the actual goods and services supplied, remains unchanged.
What has changed is simply the monetary unit, which has been diluted, and the purchasing
The rising power of the monetary unit will fall enough, that is, prices of goods will rise, to bring the new money relation into equilibrium.
One of the most important economic laws, therefore, is, 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.
Some writers have inferred from this law that any factors devoted to gold mining are being used unproductively, because an increased supply of money does not confer a social benefit.
They deduce from this that the government should restrict the amount of gold mining.
These critics fail to realize, however, that gold, the money commodity, is used not only as money,
but also for non-monetary purposes, either in consumption or in production. Hence, an increase
in the supply of gold, although conferring no monetary benefit, does confer a social benefit
by increasing the supply of gold for direct use.