by Frank Schostak*
Demand for goods arises from perceived benefits. For example, people crave food because it nourishes them. However, it is not the pieces of paper that we call money, so why do we accept them?
According to Plato and Aristotle, the acceptance of money is a historical fact, supported by governmental decrees. It is a government decree, it is argued, that a certain thing is accepted as a common medium of exchange. However, Karl Menger doubted the validity of this view and wrote:
,An event of so great and universal importance and notoriety, so inevitable as determined by law or tradition of a universal medium of exchange, is surely cherished in the minds of men, even more surely it ought to be. Listed in many places. Yet no historical monument gives us credible news of any transaction giving a different recognition either to the means of exchange already in use or to those of people of a comparatively young culture. refers to adoption, which does little to indicate the beginning of an early era of economic civilization. use of money.,
Why traditional supply-demand analysis doesn’t explain the value of money
How does what the government announces become a medium of exchange while generating value? We know that the price of a commodity is the result of the interaction of demand and supply. From this we can conclude that the price of money is also determined by the laws of supply and demand.
While demand for goods arises from perceived benefits, people demand money based on its purchasing power in relation to different goods. The demand for money depends on the purchasing power of money, while the purchasing power of money depends on the demand for money.
We’re caught in a circular trap. (Money demand depends on its purchasing power, while purchasing power depends on money demand for a given supply). The circular appears to confirm the view that the sanctioning of funds is the result of government regulation.
Ms. Menger supports InsigoHindustan times
Ludwig von Mises’ regression theorem supports Menger’s insight. Not only did it solve the problem of money circulation, it also confirmed Karl Menger’s view that money does not come into existence by government decree.
Miz begins his analysis by stating that today’s money demand is determined by the purchasing power of tomorrow’s money. For a given amount of money, this gives the current purchasing power of money. Tomorrow’s money demand, in turn, was determined by the purchasing power of money on the previous day. The cash price was determined yesterday for a given cash supply. The same procedure applies to the previous periods.
However, this does not solve the circle problem, but seems to push it back to infinity. Not so, argues Frau. Eventually, if we go back in time, we would arrive at a time when money was just a simple commodity, priced by supply and demand. A commodity had an exchange value relative to other goods, so barter establishes its exchange value.
When a commodity becomes money, it already has an established purchasing power or price relative to other commodities. This purchasing power allows us to determine the demand for that commodity in terms of money. This in turn determines its purchasing power for a given supply on the day that commodity begins to act as money.
Once a price of money is set, it serves as input to set the price of money tomorrow. It follows that without yesterday’s information about the value of money, today’s purchasing power of money cannot be determined. With respect to other goods and services, history is not required to determine current prices because demand for these goods arises from the perceived utility of their consumption. The advantage of money is that it can be exchanged for goods and services. Consequently, one must know the past purchasing power of money in order to determine today’s demand.
Using the regression theorem, we conclude that money is unlikely to have arisen because of a government decree, since the decree cannot transfer purchasing power to something that the government declares will become a medium of exchange. According to Hans Hoffnung:
Money should arise as a commodity because a commodity can only be in demand as a medium of exchange if it already has a demand for exchange.
Once a commodity is accepted as a medium of exchange, it will continue to be accepted even if its non-monetary utility disappears. The reason for this acceptance is that people today have information about yesterday’s purchasing power, which allows for the formation of today’s money demand.
From commodity money to paper moneyEye
Originally, paper money was not treated as money, but as a representation of money, which was gold. Various paper certificates were claims to gold held at banks. Paper certificate holders could convert them to gold if needed. As individuals found it more convenient to use paper certificates to exchange goods and services, these certificates are treated as money.
The introduction of paper certificates, which are accepted as a medium of exchange, opened the door to fraudulent practices. Banks might be tempted to increase their profits by lending certificates that were not backed by gold.
In a free market economy, a bank that issues its paper certificates will quickly find that the exchange value of its certificate falls relative to the certificates of other banks. This decline in exchange value will prompt individuals to convert banks’ paper certificates issued into gold to protect their purchasing power.
However, the issuing bank will not have enough gold to redeem all the paper certificates issued and will be declared bankrupt. Therefore, the threat of bankruptcy would prevent banks from issuing paper certificates without gold backing. Paper money can therefore not have a life of its own in a free market economy and goods cannot be currency-independent.
The central bank enforces the paper standard
In response to currency issuance by banks, the government can decree that paper certificates are no longer convertible to gold, thus preventing these banks from going bankrupt. Once banks are no longer required to redeem paper certificates for gold, this opens up potential for profit, as this action would encourage the expansion of paper certificates, which in turn could lead to hyperinflation and economic collapse. could.
To avoid a collapse, the paper money standard must be managed in a way that prevents various competing banks from issuing paper certificates. This can be achieved by establishing a monopoly central bank to control the expansion of fiat currency. To assert its authority, the central bank introduces its own paper certificates to replace commercial banks’ certificates. The central bank’s certificate purchasing power is determined by exchanging paper certificates from commercial banks for central bank certificates at a fixed exchange rate.
Paper certificates issued by central banks that are declared legal tender – i.e. money – also serve as a reserve asset for the banks, which then determines the extent of the banks’ lending. It seems that the central bank can now manage and stabilize the monetary system through monetary policy. But that is not the case – the paper standard must be consistently enforced to prevent its collapse.
This means that the central bank is constantly pumping more and more money to keep the system “stable”. However, this leads to both a decrease in the purchasing power of money and a break-up cycle, which in turn destabilizes the entire monetary system.
Mies’ regression theorem shows that government regulations did not lead to withdrawals of money. The acceptance of money is determined by its past purchasing power. The regression theorem shows that purchasing power is earned because money arose as a commodity. The regression theorem also shows that paper money has purchasing power because it was originally fully backed by a commodity such as gold.
*About the author: Frank Shostak’s consulting firm, the Applied Austrian School of Economics, provides an informed assessment of financial markets and the global economy. contact email.
Source: This article was published by the MISES Institute