The Demand for Money

This chapter will be an analysis of the elements that constitute the public's demand for money.

The Supply of Goods and Services

People obtain money by supplying goods and services to the market, though often indirectly (a person works for a company that provides goods, they are paid part of the money that the company gets by selling the goods).

The more good/services that are being provided to the market, the greater is the need of the market for currency to buy those goods. Hence the greater demand for money increases its value.

Rothbard seems to suggest that, were it not for interference in the market, money would increase in value over time: prices would fall, as the results of increased production putting more goods on the market, whereas the supply of money remains unchanged.

Frequency of Payment

A look at wages/salaries: the less frequently a person is paid, the more money they will have to conserve to pay for items as the need arises. (A person paid a large sum once per month will retain more in savings than a person who is paid weekly, and spends the money as he goes).

The net effect of more frequent payments is to decrease the amount of money in savings, increasing the relative amount that is in the market, decreasing the unitary value of money, and increasing prices.

The converse is also true - less frequent payments increase the amount held in savings, decreasing the amount in the market, increasing the value of money, and decreasing prices.

Clearing Systems

Systems such as credit cards decrease the need to have money on an ongoing basis. Since money is not needed in savings until the bill is paid, there is less need to save, more money in the market, devaluing the unitary value, increasing prices.

Confidence in the Money

A factor that can cause volatility (sometimes extreme volatility) in the demand for money is consumer confidence. Examples are countries that lost wars (or expected to lose one), and the effect it had on the currency that was backed by fiat.

Inflationary or Deflationary Expectations

People act according to their expectations of what may happen in the future rather than what actually comes to pass. So if prices are expected to rise (even if there is no basis for this expectation), people may reduce their savings to purchase goods sooner - increasing the demand for goods and the supply of money on the market - thereby actually causing prices to rise.

When people's expectations bear out, their actions based on those expectations compound the effect. When reality is contrary to expectations, actions based on expectations can mitigate the effect to some degree.