2015-03-30
1. Credit Fluctuations and Financial Crisis Last post, we discussed the role of fluctuations in total credit extended to the value of production and also to the total money stock. When credit is expanded, this is typically indicative of an increase in the value of production. This can occur either through an increase in production itself, an increase in prices, or an increase in demand for...
2015-03-25
Banking When money first arises, agents must find a way to economize on cash balances. Agents can hold on to commodities, but this is a risky practice. Commodity money may deteriorate or be lost or stolen. Theft was especially a problem for those making long trips through the countryside. Holding on to cash balances is costly. Early on, agents realize this. Those with enough wealth begin to...
2015-03-23
What is Interest? When an agent owns wealth, whether in the form of a commodity or currency, he or she may decide to temporarily relinquish control of his or her asset in exchange for a return whose value is dependent upon the length of time for which the asset is relinquished. The value of the return divided by the original investment – the value of that which was lent – represents the rate of...
2015-03-03
In his 1936 treatise, Keynes formulated Say’s Law as proposing that “supply creates its own demand.” It is not clear exactly what Keynes meant by this. The statement implies an assumption of equilibrium where all excess demands are zero. That is, if supply creates its own demand, then quantity demanded of a good and the quantity supplied must be equal. This is at worst a misrepresentation of...
2015-02-25
Today we add short-run aggregate supply (SRAS) to the analysis. The short-run aggregate supply curve is tricky to justify theoretically. Given an increase in the money supply, the SRAS convey that total output increases as a result of increase in aggregate demand and a delay in price adjustments. It is convenient to think of this in terms of nominal income and then consider the behavior of the...
2015-02-24
Money may be thought of as the life blood of any economy. Possession of money by an agent empowers that agent to coordinate resources and even other agents. It is a mistake to look at money only as one good among money. This perspective may aid analysis of changes in the value of money and its allocation, but they only partly capture money’s influence. Money is the universal numeraire. It is...
2015-02-19
Today I’m going to work some fast math magic. Yesterday I reviewed the equation of exchange. Working with the products can be somewhat confusing. So, briefly, I will show the reader how to transform the equation of exchange into (approximate) sums of percent changes. The process is straight forward. 1. Begin with the equation in its basic form MV = Py 2. Log both sides ln(MV) = ln(Py)...
2015-02-18
Where does the value of money derive from? There is a common misconception that money must have some intrinsic value. A common question I hear from students is: “The dollar is backed by gold, right?” While the earliest moneys came into existence by virtue of the use value of the commodity traded, this is not the case in the world of modern finance. As you know if you have been reading this...
2015-02-11
Just as it is possible to construct a theory of the emergence of money based on principles of agent preference and action, so too is it possible to build a theory of the state monopoly of money with such principles. Both history and theory converge on the conclusion that money was by no means a creation of the state. Money arose as agents confronted difficulties associated with barter. Instead of...
2015-02-08
To the lay observer, the existence of money appears to be a given, and this is if they even notice money’s peculiarity. Money is a good, but unlike other goods, its primary use is as a medium of exchange. In the pre-modern era, money was typically linked to a commodity, but in the modern financial system, this is no longer true – at least not for base money. So how does money become an object of...