Value of Money

The Value of Money

Most economists are in agree­ment that the inflation in the United States during the past three years has been the worst since the early 1940′s, taking ac­count of both severity and dura­tion. But they cannot agree on the nature of the inflation that is en­gulfing the American economy. To some, inflation denotes a spectac­ular rise in consumer prices; to others, an excessive aggregate de­mand; and to at least one econo­mist, it is the creation of new money by our monetary author­ities.

This disagreement among econ­omists is more than an academic difference on the meaning of a popular term. It reflects profes­sional confusion as to the cause of the inflation problem and the pol­icies that might help to correct it. A review of some basic prin­ciples of economics that are ap­plicable to money may shed light on the problem.

Two basic questions need to be answered: (1) What are the fac­tors that originally afforded value to money, and (2) What are the factors that effect changes in the “objective exchange value of mon­ey” or its purchasing power?

Money is a medium of exchange that facilitates trade in goods and services. Wherever people pro­gressed beyond simple barter, they began to use their most market­able goods as media of exchange. In primitive societies they used cattle, or measures of grain, salt, or fish. In early civilizations where the division of labor extended to larger areas, gold or silver emerged as the most marketable good and finally as the only medi­um of exchange, called money. It is obvious that the chieftains, kings, and heads of state did not invent the use of money. But they frequently usurped control over it whenever they suffered budget deficits and could gain revenue from currency debasement.

When an economic good is sought and wanted, not only for its use in consumption or production but also for purposes of exchange, to be held in reserve for later ex­changes, the demand for it obvi­ously increases. We may then speak of two partial demands which combine to raise its value in exchange—its purchasing pow­er.

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