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NOTE What is the Optimum Quantity of Money?

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What is the optimum quantity of money?

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The total stock or supply or quantity of money in any area or society at any given time is simply the sum total of all the ounces of gold or units of money in that particular society or region.

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Economists have often been concerned with the question, what is the optimal quantity of money?

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What should the total money stock be at the present time?

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How fast should that total grow?

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If we consider this common question carefully, however, it should strike us as rather peculiar.

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How come, after all, that no one addresses the question,

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what is the optimal supply of canned peaches today or in the future,

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or Nintendo games or ladies' shoes?

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In fact, the very question is absurd.

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The crucial fact in any economy is that all resources are scarce in relation to human wants.

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If a good were not scarce, it would be superabundant and therefore be priced, like air, at zero on the market.

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Therefore, other things being equal, the more goods available to us, the better.

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If someone finds a new copper field or discovers a better way of producing wheat or steel,

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These increases in supply of goods confer social benefit. The more goods, the better. Unless we return to the Garden of Eden, for this would mean that more natural scarcity has been alleviated and living standards in society have increased.

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It is because people sense the absurdity of such a question that it is virtually never raised. But why then does an optimal supply of money even arise as a problem?

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Because while money, as we have seen, is indispensable to the functioning of any economy beyond the most primitive level and while the existence of money confers enormous social benefits, this by no means implies, as in the case of all other goods, that other things being equal, the more the better.

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For when the supplies of other goods increase, we either have more consumer goods that can be used, or more resources or capital that can be used up in producing a greater supply of consumer goods.

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But of what direct benefit is an increase in the supply of money?

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Money, after all, can neither be eaten nor used up in production. The money commodity functioning as money can only be used in exchange, in facilitating the transfer of goods and services and in making economic calculation possible.

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But once a money has been established in the market, no increases in its supply are needed, and they perform no genuine social function.

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As we know from general economic theory, the invariable result of an increase in the supply of a good is to lower its price.

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For all products except money, such an increase is socially beneficial,

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Since it means that production and living standards have increased in response to consumer demand,

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if steel or bread or houses are more plentiful and cheaper than before everyone's standard of living benefits.

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But an increase in the supply of money cannot relieve the natural scarcity of consumer or capital goods.

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All it does is to make the dollar or the franc cheaper.

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That is, lower its purchasing power in terms of all other goods and services.

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Once a good has been established as money on the market, then it exerts its full power

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as a mechanism of exchange or an instrument of calculation.

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All that an increase in the quantity of dollars can do is to dilute the effectiveness, the

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purchasing power, of each dollar.

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Hence, the great truth of monetary theory emerges. Once a commodity is in sufficient supply to be adopted as a money, no further increase in the supply of money is needed. Any quantity of money in society is optimal. Once a money is established, an increase in its supply confers no social benefit.

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Does that mean that once gold became money, all mining and production of gold was a waste?

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No, because a greater supply of gold allowed an increase in gold's non-monetary use.

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More abundant, lower-priced jewelry, ornaments, fillings for teeth, and so on.

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But more gold as money was not needed in the economy.

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Money, then, is unique among goods and services since increases in its supply are neither beneficial nor needed.

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Indeed, such increases only dilute money's unique value to be a worthy object of exchange.