WEBVTT NOTE 11.04. Utility of the Stock of Money 1 00:00:00.000 --> 00:00:06.120 4. Utility of the Stock of Money 2 00:00:06.120 --> 00:00:12.280 In the case of consumers' goods, we do not go behind their subjective utilities on people's 3 00:00:12.280 --> 00:00:19.760 value scales to investigate why they were preferred. Economics must stop once the ranking 4 00:00:19.760 --> 00:00:26.560 has been made. In the case of money, however, we are confronted with a different problem. 5 00:00:26.560 --> 00:00:33.540 For the utility of money, setting aside the non-monetary use of the money commodity, depends 6 00:00:33.540 --> 00:00:41.280 solely on its prospective use as the general medium of exchange, hence the subjective utility 7 00:00:41.280 --> 00:00:49.520 of money is dependent on the objective exchange value of money, and we must pursue our analysis 8 00:00:49.520 --> 00:00:54.640 of the demand for money further than would otherwise be required. 9 00:00:54.640 --> 00:01:00.440 For other goods, demand in the market is a means of routing commodities into the hands 10 00:01:00.440 --> 00:01:02.400 of their consumers. 11 00:01:02.400 --> 00:01:08.640 For money, on the other hand, the price of money is precisely the variable on which the 12 00:01:08.640 --> 00:01:15.520 demand schedule depends, and to which almost the whole of the demand for money is keyed. 13 00:01:15.520 --> 00:01:22.000 To put it in another way, without a price, or an objective exchange value, any other 14 00:01:22.000 --> 00:01:27.860 Other good would be snapped up as a welcome free gift, but money without a price would 15 00:01:27.860 --> 00:01:36.100 not be used at all, since its entire use consists in its command of other goods on the market. 16 00:01:36.100 --> 00:01:42.720 The sole use of money is to be exchanged for goods, and if it had no price and therefore 17 00:01:42.720 --> 00:01:49.880 no exchange value, it could not be exchanged and would no longer be used. 18 00:01:49.880 --> 00:01:56.760 We are now on the threshold of a great economic law, a truth that can hardly be overemphasized 19 00:01:56.760 --> 00:02:01.480 considering the harm its neglect has caused throughout history. 20 00:02:01.480 --> 00:02:08.320 An increase in the supply of a producer's good increases, Ceteris Paribus, the supply 21 00:02:08.320 --> 00:02:10.440 of a consumer's good. 22 00:02:10.440 --> 00:02:15.920 An increase in the supply of a consumer's good, when there has been no decrease in the 23 00:02:15.920 --> 00:02:34.160 Money, on the contrary, is solely useful for exchange purposes. 24 00:02:34.160 --> 00:02:41.120 Money per se cannot be consumed and cannot be used directly as a producer's good in 25 00:02:41.120 --> 00:02:43.360 the productive process. 26 00:02:43.360 --> 00:02:51.180 Money per se is therefore unproductive, it is dead stock and produces nothing. 27 00:02:51.180 --> 00:02:59.360 Land or capital is always in the form of some specific good, some specific productive instrument. 28 00:02:59.360 --> 00:03:05.020 Money always remains in someone's cash balance. 29 00:03:05.020 --> 00:03:11.400 Goods are useful and scarce, and any increment in goods is a social benefit. 30 00:03:11.400 --> 00:03:16.920 That money is useful not directly, but only in exchanges. 31 00:03:16.920 --> 00:03:23.520 And we have just seen that as the stock of money in society changes, the objective exchange 32 00:03:23.520 --> 00:03:30.680 value of money changes inversely, though not necessarily proportionally, until the money 33 00:03:30.680 --> 00:03:34.080 relation is again in equilibrium. 34 00:03:34.080 --> 00:03:39.600 When there is less money, the exchange value of the monetary unit rises. 35 00:03:39.600 --> 00:03:44.940 When there is more money, the exchange value of the monetary unit falls. 36 00:03:44.940 --> 00:03:52.140 We conclude that there is no such thing as too little or too much money, that whatever 37 00:03:52.140 --> 00:03:59.600 the social money stock, the benefits of money are always utilized to the maximum extent. 38 00:03:59.600 --> 00:04:04.600 An increase in the supply of money confers no social benefit whatever. 39 00:04:04.600 --> 00:04:09.880 It simply benefits some at the expense of others, as will be detailed further. 40 00:04:09.880 --> 00:04:17.540 Similarly, a decrease in the money stock involves no social loss, for money is used only for 41 00:04:17.540 --> 00:04:24.700 its purchasing power in exchange, and an increase in the money stock simply dilutes the purchasing 42 00:04:24.700 --> 00:04:27.400 power of each monetary unit. 43 00:04:27.400 --> 00:04:34.600 Conversely, a fall in the money stock increases the purchasing power of each unit. 44 00:04:34.600 --> 00:04:40.940 David Hume's famous example provides a highly oversimplified view of the effect of changes 45 00:04:40.940 --> 00:04:46.140 in the stock of money, but in the present context it is a valid illustration of the 46 00:04:46.140 --> 00:04:52.960 absurdity of the belief that an increased money supply can confer a social benefit or 47 00:04:52.960 --> 00:04:56.420 relieve any economic scarcity. 48 00:04:56.420 --> 00:05:01.880 Consider the magical situation where every man awakens one morning to find that his monetary 49 00:05:01.880 --> 00:05:04.220 assets have doubled. 50 00:05:04.220 --> 00:05:09.380 Has the wealth or the real income of society doubled? 51 00:05:09.380 --> 00:05:10.420 Certainly not. 52 00:05:10.420 --> 00:05:17.940 In fact, the real income, the actual goods and services supplied, remains unchanged. 53 00:05:17.940 --> 00:05:24.220 What has changed is simply the monetary unit, which has been diluted, and the purchasing 54 00:05:24.220 --> 00:05:35.220 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. 55 00:05:36.220 --> 00:05:53.220 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. 56 00:05:54.220 --> 00:06:08.220 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. 57 00:06:08.220 --> 00:06:14.220 They deduce from this that the government should restrict the amount of gold mining. 58 00:06:14.220 --> 00:06:22.220 These critics fail to realize, however, that gold, the money commodity, is used not only as money, 59 00:06:22.220 --> 00:06:29.660 but also for non-monetary purposes, either in consumption or in production. Hence, an increase 60 00:06:29.660 --> 00:06:37.020 in the supply of gold, although conferring no monetary benefit, does confer a social benefit 61 00:06:37.020 --> 00:06:40.460 by increasing the supply of gold for direct use.