Reply To: Demand for money


The reason demand for money increases during economic progress is that as a person becomes wealthier he typically desires to hold a larger amount of assets, including money. Of course, people don’t have to do this, but it seems that during the economic progress of the latter part of the nineteenth century, they did hold more money and their standards of living rose. (The money supply was increasing at roughly the same rate as the rate of increase in real GDP.)

Saving and lending money earns the rate of return on investment. Holding money earns no rate of return since a person keeps the money in his possession instead of investing it. A person decides how to disburse his income between consumption and saving-investing by his time preference and into money holding by his preference to hold money as an asset. Of course, a person could have preferences such that he always holds a minimum amount of money and consumes and invests as much of his income as possible. But this is done to satisfy his preferences, not to produce a stable PPM. The PPM, like any price is a social phenomenon which no one person can control by his actions.