Wednesday, June 8, 2016

Eleven Fun Facts About . . . Money!

We were going to go with “Money Jeopardy” after the television quiz show, but decided that’s the title for a different posting . . . about how our monetary system is so screwed up as to put the whole concept of money itself in jeopardy.  What we’re after today are just a few fun facts about finance, the things you don’t think about, but should.  (We were going for ten, but ended up with eleven.  Go figure.)  For starters —
Yes, even this, scary as it is, can be money, if it's used in trade.
1. What is money?  That’s an easy one: anything that can be accepted in settlement of a debt.
2. What is credit?  A promise to deliver something of value — settle a debt — sometime in the future.  Money and credit are just two different aspects of the same thing.  “Money” is generalized credit, or “credit” is particularized money, whichever way you want to look at it.  All money is a contract and, in a sense, all contracts are money.
3. When was money invented? The first time someone made a trade.
4. Who creates money?  Anyone who makes a trade.
5. What’s government’s role in all this? It makes certain people keep the promises they make, i.e., it enforces contracts, even though most contracts are fulfilled without having to be enforced.  To make life easier for everyone, government also sets the standard for the “currency.”
6. What is currency?  Current money, that is, a recognized measure of value that can be traded freely because all currency units legally have the same value.
7. What is a reserve currency?  A currency into which other forms of money can be converted on demand.
8. Does government create money?  No.  Government regulates money and enforces contracts.  It does not legitimately create money, because to be able to create money you need to be able to trade what you have for what someone else has, and government doesn’t produce anything.  Except in socialism.  We’re not discussing socialism.
9. What is the money supply?  The vast bulk of the money supply in a free market consists of contracts between people carrying out exchanges.  Next comes currency, including demand deposits (checking accounts).  What most people think of as money is actually the smaller part of the money supply.
10. What is the Currency Principle?  The Currency Principle is the theory that the amount of money in the economy determines the level of economic activity.  Thus, in the Quantity Theory of Money Equation, M x V = P x Q, where M is the amount of money, V is the velocity of money (the average times a unit of currency is spent during the period), P is the price level, and Q is the number of transactions, M is the “independent variable,” and V, P, and Q are dependent variables.
11. What is the Banking Principle?  The Banking Principle is the theory that the level of economic activity determines the amount of money in the economy.  Thus, in the Quantity Theory of Money equation, M x V = P x Q, V, P, and Q are independent variables, and M is the dependent variables.
Wasn’t that fun?  Tune in tomorrow, and we just might (we said “might”) have some fun facts about reviving Glass-Steagall, or at least a posting on the subject.

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