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Daily Archives: November 7, 2011

Thinking about: Money

Edward Harrison, filling in for Yves Smith over at Naked Capitalism, posed up an attempt to link modern monetary theory to Austrian economics. It makes for a great read, is a valiant effort, but I believe (in my “I’m just an old country lawyer, not an economist) it still misses one important point – there is no need for “government” to be involved in “money.” Let me suggest that money is nothing more exciting than any item, tangible or intangible, with or without intrinsic value,* which is accepted as a common medium of exchange in a social group. Fiat currency issued by a State is required by law to be accepted as money, but like all money is subject to the normal laws of supply and demand.

Mr. Harrison points out, quite rightly, that a given area only has X amount of productive capacity based on resources and infrastructure. If the capacity remains constant, then an increase in money creates inflation – more money chasing fewer resources. If the capacity increases, there may be deflation – more resources requiring less money to obtain. In the bad old days, States used to have to at least run printing presses to produce more and more money. Now it’s just – as Mr. Harrison says – keystrokes. At some point, though, those fiat bills overwhelm the productive capacity of the area and inflation – or hyperinflation – results.

Of course, maybe I’m just not sophisticated enough to understand all of the other bits and pieces. Still, one has to ask the important question in regards to the economy:

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*if the item has intrinsic immediate value, then it’s potentially bartering.