The Uses of Money

Austrian Political Economy

Austrian Political Economy

I write about economics and political philosophy.

Money is the economy’s medium of exchange. The great utility of its employment is that it obviates the requirement for a coincidence of wants among the parties to a trade, and it permits the employers of scarce resources–the entrepreneur-producers–to engage in economic calculation and thereby achieve an efficient allocation of resources. 

In all modern economies, money is invariably fiat money; that is, government-issued money that is not backed by a commodity, such as gold or silver. Accordingly, the use-value of money is virtually nil. However, where commodity money is used, money can have significant use-value.

For example, gold and silver can be melted down for jewellery, adornments, electronics, and dental applications. Under fiat money, conversely, money derives its value solely from its exchangeability. 

There are three principal ways money can be used. First, it can be used to facilitate the acquisition of an economic good for consumption purposes. Second, it can be used for the expenditure necessary to obtain an economic good for production purposes. 

The third use is to allocate the money to one’s cash balance. The point of accumulating a cash balance is to be prepared for future exchange transactions. From the individual’s decision to maintain a cash balance, we deduce that he values holding the money more than he values the goods he could obtain in exchange for it. Remember what Rothbard said: “we deduce the existence of a specific value scale on the basis of a real act; we have no knowledge of that part of a value scale that is not revealed in real action.” 

Some economists have contended that holding money is unproductive and inimical. As Professor W.H. Hutt demonstrated in his essay The Yield from Money Held, this is an erroneous doctrine. Money held in an individual’s cash balance is not unproductive and sterile; it yields satisfaction for the individual. The satisfaction derived from holding money is often manifested in a feeling of security. The source of this satisfaction is the belief that in the future one will be able to avail himself of his cash balance in order to pay for transactions and satisfy his wants.


In sum, holding money is not redundant, nor is it harmful; it is a perfectly legitimate use of one’s money and, as has been mentioned, satisfaction accrues from the action of accumulating a cash balance. The denunciation of this use of money stems from ignorance of economics.


Bibliography 


Rothbard. 1962. Man, Economy, and State.
Hutt. 1952. The Yield from Money Held.