>> February 11, 2020
>> Blog Post #28
The Proper Supply of Money
- Questions about the supply of money:
- How much money do we need?
- Can the supply be regulated? On what criterium?
- Should it be left to the free market?
- The total money supply is the total weight of all the money existing in the world.
- The shape of the money is unimportant, but if one of the shapes is accepted by the market as being more convenient, it will be chosen as the money of account.
- The other shapes of that money will then trade at a premium or a discount.
- Increases in the volume of money will the result of greater production of it and decreases from wear and tear.
- The proportion of new annual
production of money relative to its total stock will be fairly low as:
- The market will choose a durable commodity as a money,
- Money is not used up at the same rate as other commodities.
- Few people suggest leaving the supply of money be dictated by the free market.
- The price of money is determined by
supply and demand:
- If demand rises, prices will rise,
- If supply rises, prices will decline,
- So, what are the supply and demand for money?
- Money is only useful for its
- If the supply rises, it will dilute its purchasing power.
- So, it does not matter what the total supply of money is. Any number will do.
- The market will naturally adapt by adjusting the purchasing power of the unit.
The problem of hoarding
- Is hoarding really a menace?
- When there is hoarding, there is an increase demand for money. Prices fall, and the purchasing power of money rises.
- It is not irrational for people to want to increase their cash balances.
- People have cash balances because of the uncertainty in the future.
- Money does not only carry value at the moment of exchange.
- People often overlook that delaying exchange in the expectation that the purchasing power of money might increase is a perfectly acceptable proposition.
- In a perfectly certain world, no one would choose to hold cash.
- People do not want more money; they want a greater command of goods that money can be exchanged for with the same amount of money.
- People do not want to increase the total supply of money, as that would dilute the purchasing power of money.
Just a little note on the two items covered today. As someone who is extremely interested in bitcoin overall, I feel there are a lot of questions that are interesting to look at in the context of how bitcoin might be a new money media with intriguing characteristics that might make it very popular down the line.
- Bitcoin proposes a fixed supply of money. People often discuss whether the total supply – 21 million bitcoin – is the right number or not, or if there should have been an annual growth rate set into the protocol at its creation. I still rarely hear the opinion that the total supply is totally unimportant, which is what Rothbard suggests.
- For commodities such as gold, which Rothbard bases a lot of his examples on, gold does have a commodity value in addition to its pure medium of exchange properties. What are the commodity properties of bitcoin?
- Today, most governments are implementing aggressive policies to remove physical cash more and more, diminishing the capacity of individuals to easily maintain or increase their cash balances and manage uncertainty, reinforcing individual’s reliance on governments even more in the process. Looks like a vicious circle to me.