Reply To: Monetary Inflation/Deflation


Every action has a value gained and a cost foregone. The cost of any action is the value of the next best end that could have been achieved if the resources had not gone to attain the end that was achieved. An action is only justified when its value exceeds its cost. In society, the resources used to attain one end satisfy a particular group of people and the the same resources used to attain the next best end satisfy a different group of people. The only way to objectively compare the value to all the persons who benefit from one end attained with the value to all the person who forego the benefit from the next best end is the market, i.e., each person demonstrates his preference for each end relative to money. Outside of the market, i.e., without a market, it is impossible to objectively compare the preferences of different persons.

Money demand is fulfilled by the holding of a stock of money. This principle of action an be generalized to all goods. People participate in exchange to obtain a more valuable stock of goods. They give up what the value less to obtain what they value more. It is imprecise and unnecessary to say that money “circulates.” Metaphors are unnecessary in reasoning when the concepts themselves are clearer. Moreover, it makes little sense to generalize this metaphor for all goods. Of course, one can calculate all sorts of strange figures from market data. Would any economic-theoretical knowledge be gained by calculating the rate of circulation of automobiles per year or shoe factories per month that could not be gained in a more straight-forward manner. It is more meaningful to say that the demand to hold money has increased than to say that the circulation of money has slowed down. Money is actually held by people. It does not circulate.

Here is Henry Hazlitt on the velocity of circulation of money.