Comments (8)

• Jake

  What we need today is more "Henry Hazlitts" who can teach Austrian Economics to plebs like me.

  If I didn't start reading his works first, I would have lost interest and the treasury of knowledge at LVM would have been lost to me.

  This might sound a bit cheesy, but Austrian Economics has drastically changed my life... sort of like taking the Red Pill. :-D

  Published: March 17, 2008 11:41 AM

• fundamentalist

  Very enlightening! Thanks!

  Published: March 17, 2008 12:45 PM

• fundamentalist

  Hazlitt: “It is true that in periods of falling money value, when money is expected to fall further, people will try to reduce their cash holdings to a minimum. But as a universal thing this will be impossible. The total quantity of money remaining the same, or even increasing, somebody must hold it, and the average per capita holding will not decrease. The faster consumers seek to get rid of money, the faster tradesmen must take it in. The average individual cash holding must always be the total supply of money outstanding divided by the population.”
  I interpret this to mean that the aggregate demand for money doesn’t change in the short run, since the desire to hold less cash must be offset by someone else desiring to hold more. So the demand for money can only change by population increase. Does anyone have any thoughts on this?
  

  Published: March 17, 2008 4:10 PM

• jp

  Yours sounds like a good interpretation to me, given that fact that Hazlitt qualifies his statement by saying the total quanitity of money must stay the same.

  If you relax this statement, a drop in aggregate demand for money might be possible. You and me could empty our chequing accounts so we are holding only paper dollars. Those chequing account dollars disappear. Than we'd go to the Fed and exchange paper dollars for bonds. Those dollars are then cancelled and we are left holding bonds. The total amount of money in the system has dropped.

  This is assuming a world where the Fed granted everyone convertability whenever they wanted, which they don't. So Hazlitt's qualification makes sense, as does your comment that aggregate demand doesn't change in the short run. The Fed's rules about convertability prevent a drop in money demand from having any influence on total money supply. This forces the money to stay out in the system so that only increases in population will reduce cash holdings per capita.

  Published: March 17, 2008 5:05 PM

• fusgerm

  fundamentalist: "I interpret this to mean that ... the demand for money can only change by population increase."

  I do not think that is correct. The number of IBM shares is fixed (ignoring buybacks and new issues). But demand fluctuates all the time, and the market price changes with it. In general, for any good, if the supply is fixed, the price rises and falls with demand.

  If the end of the world is imminent, then the demand for money will drop, as people seek to exchange it for consumer goods. The value of money relative to consumer goods will drop.

  If war is imminent, and the uncertainty causes people to delay purchases, then the demand for money will rise. The value of money will rise.

  Of course, it is true that the price of money, measured in money, never changes. But the value of money is not measured by money. The value of goods and services is measured in money, but the value of money is measured by its purchasing power of goods and services.

  From von Mises' Human Action: "He who wants to increase his cash holding restricts his purchases and increases his sales and thus brings about a tendency toward falling prices. He who wants to reduce his cash holding increases his purchases - either for consumption or for production and investment - and restricts his sales; thus he brings about a tendency toward rising prices."
  

  Published: March 17, 2008 9:13 PM

• leonidia

  fundamentalist said: "So the demand for money can only change by population increase. Does anyone have any thoughts on this?"

  Your analysis is not correct. A major point Hazlitt was making is that the demand for money is affected by psychology (the subjective valuation that the market places on money), which influences a) how much people want to obtain money by selling goods and services and b) how much they want to hold it in reserve. These two factors combined make up the demand for money. To quote from Rothbard in MES Ch11:
  "The total demand for money on the market consists of two
  parts: the exchange demand for money (by sellers of all other
  goods that wish to purchase money) and the reservation demand
  for money (the demand for money to hold by those who already
  hold it)."

  Published: March 18, 2008 1:06 AM

• leonidia

  I want to clarify my last post. A population increase could well change the demand for money, but it is not correct to say that it is the *only* thing that can do so.

  Published: March 18, 2008 10:05 AM

• DickF

  fundamentalist,

  Consider this. Goods and services are priced in money. Conversely money is priced in goods and services. But do not forget that goods and services are also priced in other goods and services.

  If the demand for money falls across the board the producers of goods and services will value their goods and services greater and will shift toward the non-money economy. The goods still exchanged for money will decline and more money will be demanded per unit. This will cause an increase in the money price of goods and services or a decline in the exchange value of money.

  As economic agents lose faith in money it can actually decline in quantity and yet continue to decline in value.

  Consider the American Continental money. The increase in supply by congress destroyed the value of the money. Once that happened Congress stopped issuing the money, but the money did not recover until Alexander Hamilton convinced congress to honor the Continental at face value in gold.

  I believe the point that Hazlitt is making is that money is different from other goods in that it is based on the faith of the economic actors to use it in exchange. As the faith wanes the value of the money declines.
  

  Published: March 18, 2008 6:55 PM