Money

(A half-finished article, but worth a read)

My recent intemperate rant against John Lennon’s “Imagine” and its rejection of a world of possessions leads me on to another topic, which is the utopian desire that is sometime expressed to say “wouldn’t it be wonderful if we could live without money ?”.  The answer is actually a firm “No, it would be bloody awful”.

This is not to defend unbridled capitalism, bankers’ bonuses, wealth inequalities or all of the other annoyances of a wicked world.  It is simply to say that money is one of the great inventions of humanity.  To my mind, it’s up there with the wheel and dental anaesthetic.  Let’s be clear what we are talking about: money is defined as whatever is generally accepted in payment for goods and services, or in settlement of debt.  So diamonds aren’t money, and neither are old masters or fine wine or stocks and shares.  But the invisible material that’s in your bank account (there is much more money in bank accounts than in coins or notes) is money, because it is acceptable to transfer it to pay for stuff.

Why do we have it ?  Well, kids studying Economics have to learn the three functions of money:

First, it’s a medium of exchange.  You could barter to get your daily needs but, brother, would that be a drag.  To start with, you’d have to establish a mutual coincidence of wants.  If I wanted bread, I’d need not only to find a baker – I’d have to lay hands on one who wanted an economics lesson, and wanted it right now.  And every other day for the next fifteen years or so.  Now, Waitrose is a cultured place, and I am sure the thirst for adult education is as likely to be there as anywhere, but there is another problem, that I would have to give a loaf sized lesson – not too long or short.  And an economics lesson may be portable (PowerPoint projectors are pretty light these days) but other products people may want to barter are not portable.  Bricks ?  RSJs ?  Batteries ?

And don’t even think about how to live a life of barter in retirement …

Secondly, money is a unit of account.  It can tell you how much a house or T-shirt or bag of chips is worth in relation to each other of another house, shirt or bag of chips.  Money is like a metre or a litre, and this is essential when (e.g.) doing a set of accounts or understanding if you can afford something.

Thirdly, money is a store of value.  You can do your job today, get paid, and not spend the resulting wealth until you want to.  Obviously there have been times in history when money has not performed this function well – under hyperinflation.  We used to use the German inflation of 1922 as the acme – 28,000% a month, but the new champion is in Africa.  In 2008, Zimbabwe’s inflation reached 7 billion per cent.  This is, however, not normal.  Keeping long term savings in cash is not a great idea, but these days you won’t be devastated to hold your wages for a week or so.

Any society needs enough money to keep transactions going.  Too little, and people start hanging on to cash, causing a decline in economic activity.  Too much, and you’re likely to have inflation as prices rise.  The general equation is this: PV = MT, where P = the price level, V = the velocity of money (how quickly it is turned over from person to person), M =  the quantity of money and T is the amount of transactions (i.e. the volume goods and service we buy).  This equation started with Irving Fisher, an American economist, and is known as the Quantity Theory of Money.  It is sometimes claimed that any increase in money supply will cause inflation, but you can see from the equation above that a rise in M could result in more T (i.e. it could encourage output and trade) or a lower V (i.e. we could keep bigger balances).  What actually happens is, as I think you know, a matter of controversy.

There have been some amusing articles about the effects of a squeeze on currency.  One looked at a system in which New York professional couples started a system of baby-sitting tokens.  Briefly, when there was a shortage of tokens, people started to use them more sparingly and the whole system clogged up: only an issue of new tokens allowed folk to go out again.  The Open University once published a study of the use of cigarettes as money amongst prisoners (an economist in the RAF got shot down and had nothing better to do in a POW camp).  Same deal as the baby sitters – when the Red Cross parcels arrived, the price of rare stuff like warm blankets in terms of cigarettes rose.