Is Money Wealth?

Column for week of August 11, 2014                               

     People with large amounts of money are commonly
called wealthy.  Does this prove that money is wealth?  Money
isn't eatable.  It doesn't make good houses.  It isn't much good
for transportation.  Money is almost useless, except for one
thing.  Money has value only if it can be exchanged for real
wealth.

     Consider a dry cleaner's claim check for a coat.  It is just
a piece of paper with words on it.  In itself it has no more value
than an empty candy wrapper.  The claim check derives it value
from the coat in represents.  Destroy the claim check and no
value is lost  The coat still exists.  There may be some confusion
about who is entitled to the coat.

     Destroy the coat and the claim check will be worthless. 
The claim check derived its value from the coat.  Likewise
money derives its value from the real wealth that can be bought
with it.  Money isn't wealth.  Creating money doesn't create
wealth.  Destroying money doesn't destroy wealth.  As with the
claim check for a coat, destruction of money may affect who is
entitled to the wealth.

     Money is sometimes considered useful for storing wealth. 
This is an illusion.  Money has value only so long as someone
will accept it in exchange for real wealth.  The value of money
is based on faith in the money being accepted in exchange for
real wealth.  Destroy that faith and the money is worthless.

     Unlike a claim check for a coat, money doesn't entitle the
holder to demand anything from anyone.  The owner can refuse
to accept money in exchange for his wealth.  In practice stable
money works like a claim check.  If one million dollars is spent
each day, each dollar will buy one millionth of what is sold.

     There are two ways to change the value of money.  One
is to change the quantity of goods being sold.  In our example if
sellers cut in half the goods offered for sale, the million dollars
will only buy half as much.  It will take two dollars to buy what
one bought before.

     If buyers cut their spending to $500,000 a day, each
dollar will buy twice as much as before.  Increasing the quantity
of goods sold or reducing the quantity of money spent will
increase the purchasing power of the dollar.

     If both are increased or decreased by the same percent, 
the purchasing power of a dollar will be unchanged.  It isn't the
amount of goods available for sale or the amount of money
available to spend  that drives prices.  The amount of money
being spent and the amount of goods being sold determines
prices.

     This explains how the Federal Reserve could create about
three trillion new dollars over the past six or so years without
causing rampant inflation.  Most of those new dollars are still on
deposit at the Federal reserve rather than being spent.  If those
dollars escape into the marketplace, look out.  Price inflation
will soar as the value of the diluted dollars shrinks.

     The only way to store wealth is to store real wealth, food,
clothing, autos, factories, machines etc.  The only real wealth is
consumer goods and things useful for producing consumer
goods.

     Money will retain its value as claim checks only so long
as someone produces real wealth that they will exchange for
money.  Using money to store value will work only so long as
the money supply doesn't grow substantially faster than the
supply of goods produced and offered for sale in exchange for
money.

     With paper money and fractional reserve banking we are
at the mercy of government and the banks as to how fast the
money supply will grow.  How comforting is it that using the
reserves already created private banks could flood the market
with about 20 trillion dollars of new credit money.  Twenty
trillion dollars is more than either the annual gross domestic
product or the national debt.

aldmccallum@gmail.com
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Copyright 2014
Albert D. McCallum