Creating More Money Won't Revive The Economy

In response to the coronavirus, central banks worldwide are currently pumping massive amounts of money. This pumping, it is held, is going to arrest the negative economic side effects that the virus-related panic inflicts on economies. As appealing as it sounds we suggest that this view is erroneous.

The view that more money can revive an economy is based on the belief that money transmits its effect through aggregate expenditure. With more money in their pockets, people will be able to spend more and the rest will follow suit. Money then, as one can see in this way of thinking, is a means of payments and a means of funding.

Money, however, is not the means of payments but the medium of exchange. It does not have a life of its own; it only enables one producer to exchange his produce for the produce of another producer.

The means of payments are always real goods and services, which pay for other goods and services. All that money does is facilitating these payments - it makes the payments for goods and services possible.

Thus, a baker exchanges his bread for money and then uses money to buy shoes. He pays for shoes not with money but with the bread, he produced. Money just allows him to make this payment. Also, note that the baker's production of bread gives rise to his demand for money.

When we talk about demand for money, what we really mean is the demand for money's purchasing power. After all, people do not want a greater amount of money in their pockets so much as they want greater purchasing power in their possession.

On this Mises wrote,

The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. [1]

In a free market, in similarity to other goods, the price of money is determined by supply and demand. Consequently, if there is less money, its exchange value will increase. Conversely, the exchange value will fall when there is more money.

Within the framework of a free market, there cannot be such thing as "too little" or "too much" money. As long as the market is allowed to clear, no shortage of money can emerge.

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