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The case of money as being neither a production good, nor a consumption good

Remember that money is a reality. It is not an abstract phenomenon. Consequently, money serves as a price index

 

By Colls Ndlovu

 

Money is primarily a capitalistic phenomenon. It is an object of capitalism. Its use and utility is diminished in socialist regimes where the division of labour is not prioritised.

Money functions as a common denominator of exchange, that is to say, as a common medium of exchange in the business of the markets. Money has already been described as the lubricant for the wheels of the economy.

Without liquid money, the market gets a seizure and a severe financial strife would set in and devastate the economy. In the exchange of goods and services which includes currencies, the more valuable and the more convertible currency would tend to be readily acceptable by the market while the less efficient currency would at times be rejected by the market owing to its short-comings.

With the ongoing rejection of unsuitable commodities as media of exchange, with time one reliable and trustworthy commodity would remain as the common medium of exchange. That scenario gives rise to money within that market.

Money’s function – apart from being a store of value – is to facilitate the interchange of goods and services. Money is also a key feature in the settlement of liabilities. Therefore, the capability of being used as a payment transmission mechanism is an essential aspect of money.

Money and its various medias of exchange

Moreover, money has been described as a measure of value. Opponents of this view have argued that the measurement of value is subjective due to the fact that it is assigned at the whims and caprices of the individuals – usually individuals with vested interest thus providing a setting for a potential conflict of interest.

The assignment of value is a function of the process of valuation. When dealing with money, one needs to remember that money is a reality. It is not an abstract phenomenon. Consequently, money serves as a price index.

Money has become a tool that accompanies the human mind when making rational economic decisions. In economics, as in business, it’s a question of whether or not a decision will result in a financial loss or not.

Money occurs with various kinds of substitutes. In most transactions, no actual cash changes hands physically. Symbolic objects are often used instead of money itself.

This could be in the form of electronic transactions or cheques or other representative media of exchange such as confirmation of payment or receipt or a certificate of deposit, inter alia.

There has been commodity-based forms of money as fully detailed in my writings on gold and other metallic currencies. Over the years, credit which is a form of debt has grown to be used as money to a certain degree. Fiat money , that is to say, paper money, has also been used as mainstream money in most countries.

Ludwig Von Mises

In general, the older forms of money were backed by commodities like gold or silver, hence the usage of the term “standard” (as in gold standard) to denote the legal weights assigned to a certain measure of what is deemed to be money.

The participation of the government in the financial markets is not different from that of other ordinary market players. Like everybody else the government transacts, extracts taxes from the market and strangely it then seeks to be the referee through regulation, that is a strange case of being a player and referee at the same time.

Thus the state abrogates itself the monopoly of printing money and supplying it to the financial system. Ludwig Von Mises has described money as being neither a production good nor a consumption good. Money has been viewed and described as an economic good.

Given its synonymity with the capitalist system, money has generally tended to come under severe criticism from critics of the capitalist system and its exploitative effect on workers. Because of its democratic blindness, money has tended to attract more censure and vitriolic criticism.

Where corruption occurs, money is blamed. Where a bribe takes place, money is blamed, ad-infinitum and ad-libitum. Money is the face of all manner of economic activity within the capitalist societies.

The conundrum of mankind

As has already been alluded to, the exchange-value of money, that is to say, the purchasing power of money is a very important characteristic of money.

This can be severely undermined and discredited by inflation which has the effect of diminishing and decimating the value of the currency. Inflation in general acts through compromising the value of money. As prices increase in general, the purchasing power of the money decreases, and vice-versa. In other words, the inverse of this statement is also true.

Monetarists tend to argue that the greatest risk facing money is excessive printing of money. This argument is very much detailed in my writings dealing with the quantity theory of money.

Led by Milton Friedman, his now immortal words have stood the test of time, “inflation is always and everywhere a monetary phenomenon caused by excessive printing of money”.

The quantity theory of money presupposes that disequilibrium in the market in terms of the forces of demand and supply, would invariably impact on the currency.

Excessive supply of money against reduced demand would trigger inflation which compromises the value of the currency.

The conundrum with mankind is that while on the one hand we furiously complain about the bad effects of inflation and the fact that it undermines wages and salaries, on the other hand the appetite for the very activities that caused inflation in the first place is always at its all time high.

The gold standard without the corrupting influence of government can ensure an inflation-free market economy.

Colls Ndlovu, a currency expert, is an award-winning economist and central banker, and is the originator and developer of the NCX Index.

 

 

 

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