22/11/2020

2. 10/01/2023


Article on What is Money

Mark McIlroy


1. Money (non-commodity-backed) is a system of points.

2. This money has no intrinsic value.

3. However money acquires value when a party offers to exchange items of real value in exchange for it. 
In general this will be the issuer of the currency.

For example, the government may offer/require that taxes are paid in this form.

Once a party offers to exchange real items for money, the currency will immediately have value to all holders and transactors of it.


4. It is in the interest of the money issuer that it has real value, see point 3.

5. Banks are businesses that are not fundamentally different from any other private business, and so cannot create money.




Inflation

6. Although discredited since the 1970's, inflation may be due over the medium term to changes in the volume of money.

7. This needs to be measured correctly.

	Volume of money = Previous money on issue + money created in the period.

	the second term on the right can be measured exactly by referring to RBA activities.

	e.g. government deficits can be funded by borrowing or by creating new money.


8.	cost of an item = (size of the item / size of all items) * volume of money

		this is proposed as a guide, the first two terms on the right are not exact things


Section B

Commodity-backed currencies


1. In a commodity-backed currency each banknote is exchangable for a fixed amount of a commodity.

2. This should result in price stablity unless large quanties of the underlying commodity are found or lost.

3. It is not necessary that the full backing volume of the commodity is in store, because the value of a dollar is set by the value put on the physical commodity that it can be exchanged for.

As long as one dollar can be exchanged for 1 ounce of gold, example, the value of a dollar should remain the same. Unless there are requests for exchange of more than is available.

As a second argument, if inflation occured in this case and the value of banknotes fell, people would start to exercise the option to exchange the banknote for the commodity.



Section C

Other examples of value of money creation - accepting money as payment for travel on public transport. It this occurs, money will be be exchanged within the community for other items of value.

Hyperinflation: Hyperinflation can be avoided by a government collecting taxes, instead of creating money, to raise the funds that are then paid out in benefits etc.