Money - Not for Consumption

We don't consume money. We don't need more.

Introduction

One big difference makes money distinct from all other economic goods. The consumption of money contributes nothing to human well-being. Having more money by itself does not make one’s life better. The holder of money values it only because he can trade it for something the consumption of which will improve his well-being.

Indirect Exchange

Each succeeding person in a series of exchanges accepts money, not because they anticipate using it or consuming it, but because they anticipate trading it for something that they can consume. If any single individual actually consumed money in his possession – by eating it, burning it, or using it as wallpaper, he would simply reduce the amount of consumable goods for which he could trade his money. The consumption of money would actually injure his economic well-being.

Money Pricing

The prices of goods in terms of money act as an important form of information in free markets. The price of a good on a single day provides little information. The patterns of prices over time provide valuable information to business managers. Falling prices generally indicate a degree of oversupply that might merit a reduction in production. Stable prices indicate satisfaction of current demand. Increasing prices indicate unsatisfied demandm which signals the probable need for an increase in production.

Changes in productivity (i.e., varying product output per units of input) will tend to move prices up or down. These price changes will tend to occur for individual producers, allowing them to capture (or lose) market share. Competing producers will also respond to these signals.

Monetary Expansion

Since money contributes nothing to human well-being, no reason exists for the production of additional money. Remember that money acts as a medium of indirect exchange. Thus, only an increase in the production of those goods for which people trade money will actually lead to increased consumption and economic well-being.

The expansion of the money supply disrupts the signals that prices send to the market. The expansion of the money supply causes higher prices than might appear in a free market. The false signals caused by the increased supply of money frequently cause producers to increase production based on a false signal.

Changes in general price levels (e.g., CPI – price inflation or deflation) occur only as a result of changes in the quantity of money, and they occur after a misallocation of resources has worked its way through the economy. Price inflation and deflation seem to indicate generalized and simultaneous changes in productivity throughout the economy. Reason excludes widespread and simultaneous changes in productivity.

Conclusion

The consumption of economic goods generally contributes to human well-being. This generalization, however, does not apply to any good playing the role of money. The consumption of money adds nothing to economic well-being in general, but consuming or destroying money can detract from the well-being of the individual doing the consuming, because he no longer has that money available for trade.

Since the purpose of production consists of providing for consumption, and money does not exist for consumption, the production of more money provides nothing for economic well-being.

Think about this statement and keep this point in mind when you contemplate statements made by The Fed and others about stimulating the economy with the expansion of the money supply.