Commercial banks (the places where you and I bank) and the central bank (the Federal Reserve, in the US) both participate as needed in maintaining the money supply. Some people take this to mean that banks decide how much money there is in the country, which could be considered either true or false, depending on what one means by “money”. I’ll put it plainly: banks aren’t deciding how much wealth there is in the country, because the workforce does that by producing output. Banks are deciding how many dollars there are in the country, the units by which we measure that wealth.
(more…)Tag: currency
Inflation and Deflation
Let’s discuss the true nature of the relationship between money supply and inflation/deflation. Imagine an island inhabited by a handful of people. They all work at the coconut tree farm, tending and harvesting coconuts and putting them in the barn for later purchase. For each day’s work, they get a seashell which they take home and put in their sock drawer. This is their island’s currency, which they will later use to buy coconuts.
(more…)A Thought Experiment About Money
The internet is littered with talk about the future of money. There’s fervor about how Universal Basic Income will solve all of our problems. There’s concern about what we’re all going to do for money when automation does away with our jobs. There’s vague talk about how post-scarcity is right around the corner and money soon won’t matter anymore. These statements indicate an incomplete understanding of what money is and how it works.
(more…)What is Money?
People say things like “I think money is…” as if money isn’t universally understood. Rest assured, money is and has to be unambiguously and precisely defined, whether you grasp the definition or not. The whole world can’t be simultaneously participating in a system of measuring wealth if the system doesn’t have very specific rules. We won’t be able to address problems with money until we’re talking about it accurately and concretely.
(more…)