What is money?

"The database stores the entries as tiny magnetic patterns on ferrous disks. Copies of this pattern are made regularly and saved on magnetic tape. When the clerk wants to look at a customer's balance, a copy of the pattern on disk is transposed to a different pattern of charged capacitors in a computer's volatile memory. The computer communicates this pattern of charges to make a human readable display on the clerk's terminal.

This isn't really money, though is it? "

I have thought about this alot too, it asks the question can banks simply create money out of nothing since as you say alot of money exists as bites on banks computer systems not as notes and coins, to an extent they can, however banks are monitored by the central bank and in our case indirectly by the european central bank, therefore if banks attempted to do this the central bank would know about it as it would not tally with their figures for money supply, it is obvious that banks cant create money out of nothing because this is what anglo et al would be at now rather than looking to the government for bail outs. However central banks do have the power to create money out of nothing this is what the Fed is at, and this is also what mugabes zimbabwe is at, however there is also a check here because international money markets will then lower the price of the currency, therefore even central banks cannot create money without some cost

joe sod said:

I have thought about this alot too, it asks the question can banks simply create money out of nothing since as you say alot of money exists as bites on banks computer systems not as notes and coins, to an extent they can, however banks are monitored by the central bank and in our case indirectly by the european central bank, therefore if banks attempted to do this the central bank would know about it as it would not tally with their figures for money supply, it is obvious that banks cant create money out of nothing because this is what anglo et al would be at now rather than looking to the government for bail outs. However central banks do have the power to create money out of nothing this is what the Fed is at, and this is also what mugabes zimbabwe is at, however there is also a check here because international money markets will then lower the price of the currency, therefore even central banks cannot create money without some cost

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If there was one hundred US dollars in circulation each would be worth one one-hundredth of the total wealth of the USA.
If there was one trillion US dollars in circulation each one would be worth one one-trillionth of the total wealth of the USA.
etc.

It’s not quite that simple but it illustrates what money is.
Printing more money simply changes the fractional value of each currency unit. It takes time for this to happen but it always does.

Purple said:

...It’s not quite that simple but it illustrates what money is.

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It certainly ain't that simple. The basic accounting identity is as follows:

[P]rice level = [M]oney supply x [V]elocity of circulation / [Q]uantity

Your formula is P = M / Q.

In the first place you are using the wrong Q. It is not the standing wealth of an economy that measures Q but its production of goods and services. It is possible to conceive of an economy with not much standing wealth but significant economic activity.

But in ignoring the velocity of circulation (propensity to spend money) that is oversimplifying.

The primary economic objective is to maximise Q, a secondary objective is to stabilise P. M is the lubricant of the economy. It is possible to increase the supply of this lubricant without increasing the price level if, for example, the economy is operating below full capacity or if people are hoarding the money i.e. reducing the velocity of circulation. In the current recession both these factors are present and it is therefore arguably correct to increase the money supply, call it printing if you like.

Duke of Marmalade said:

It certainly ain't that simple. The basic accounting identity is as follows:

[P]rice level = [M]oney supply x [V]elocity of circulation / [Q]uantity

Your formula is P = M / Q.

In the first place you are using the wrong Q. It is not the standing wealth of an economy that measures Q but its production of goods and services. It is possible to conceive of an economy with not much standing wealth but significant economic activity.

But in ignoring the velocity of circulation (propensity to spend money) that is oversimplifying.

The primary economic objective is to maximise Q, a secondary objective is to stabilise P. M is the lubricant of the economy. It is possible to increase the supply of this lubricant without increasing the price level if, for example, the economy is operating below full capacity or if people are hoarding the money i.e. reducing the velocity of circulation. In the current recession both these factors are present and it is therefore arguably correct to increase the money supply, call it printing if you like.

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Yes, I did leaving cert economics as well.
Increasing money supply when the velocity of supply is reduced is fine but as the velocity increases and the economy approaches full capacity the supply will have to be adjusted again as "Printing more money simply changes the fractional value of each currency unit. It takes time for this to happen but it always does."

Purple said:

Yes, I did leaving cert economics as well.

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Purple, I was not any way doubting your understanding. But in the words of Einstein everything should be as simple as possible but no simpler than that. I just thought you were oversimplifying a tad, that's all.

[FONT=&quot]“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money.[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.”[/FONT]
[FONT=&quot] [/FONT]
[FONT=&quot]Friedrich Hayek, [/FONT][FONT=&quot]Prices and Production [/FONT][FONT=&quot]1931 - 1935.[/FONT][FONT=&quot][/FONT]