Free Money: Paper Money The age of commodity money gave way to the age of paper money. The essence of money is now laid bare. Money, as money rather than as a commodity, is wanted not for its own sake but for the things it will buy. We do not wish to use up money directly—rather we use it by getting rid of it. Even when we choose to use it by keeping it, its value comes from the fact that we can spend it later on.
Money is an artificial social convention. If for any reason a substance begins to be used as money, people will begin to value it. A nonsmoker will value cigarettes if they are money in a prisoner of war camp.
This leads to a paradox: Money is accepted because it is accepted.
Money is useful because it allows easy and quick transactions, unambiguous determination of the price, plus storage of value over time. These services are not free money, however. If wealth were held in stocks, bonds, or savings accounts rather than money, it would yield a higher interest rate. The cost of holding money is the interest lost because the money is not invested in these alternative assets.
Let's consider yet another example. You have $1000 in your checking account, or bank money (M,). The bank pays 5 percent per year on your checking account, or $50 per year.
As an alternative, you can earn 8 percent in a money fund. Thus the net cost (or opportunity cost) of keeping your $1000 in bank money is $30 = ($80 minus $50). |
