Money is a freely created commodity. Cheap paper goes into one end of a printing press and currency notes tumble out of the other end. Money is either paper or numbers in a bank register. Money is needed in a modern society to enable trade. Money is the vital exchange medium. Money must exist and it must move. We don’t manage either of those in a masterful way. Money is easy to create but its creation in appropriate quantities has always been a hit-and-miss ‘black art’. It is further mystified by jargon. When money moves it is seen as a target for taxation. It just happens to be the worst way to tax. Money is taxed when it is being useful and moving but is un-taxed when it is being useless and idle. Money creates economic activity when moving and creates shortage of activity when idle. Our taxation habits are idiotic.
Let us look at this ten dollar note. Four weeks ago, it was wood-chips in a truck delivered to a paper manufacturer. Three weeks ago, it was stamped with the face of a dead president and some nonsensical statement about ‘promise to pay’ (pay what!). Two weeks ago, it was purchased by a private bank who paid for it by writing virtual numbers on a register. (They paid for it with money that they did not have.) One week ago, it was spat out of an ATM, by adjusting a bank ‘balance’ consisting of virtual numbers. Each time it moves it creates economic activity. (If no money moves, we all starve!) Money Must Move!
I am the hairdresser. My first customer of the day walks out with a haircut and I retain the ten dollar note. I buy breakfast at the cafe and walk out with energy for the day. The cafe owner rushes out to the farm and walks out with a basket of eggs. The farmer cycles to the bakery and walks out with bread. The baker skips to the butcher and hands the ten dollar note for some meat. The butcher gets a car repaired. The mechanic gets his lawn mowed. The mower man buys lunch. The cafe owner exchanges the ten dollar noted for flour. The shopkeeper visits me for a haircut and get back my original ten dollar note. This ten dollar note has created $100 of economic activity in one day, yet it has an intrinsic value of zero. A bucket full of economic activity was created but I finished the day with the same note. Clearly, money has no intrinsic value, but creates economic activity when it moves. Our note appears to have the potential of ten transactions in a day or 3650 transactions in a year, which is an annual $36500 of economic activity from one ten dollar note that cost nothing to create. This note is said to have a ‘Velocity’ of 3650 because it potentially changes hands 3650 times in a year. In practice, money does not change hands at this rate. The average number of transactions for our unit of money is much less. Have a guess at how many times a typical note changes hands in one year.
There are a few countries where money moves more than once in a year – dear. In so many countries, has slowed (due to inappropriate taxation regimes) to an embarrassingly low rate. The average unit of money now only changes hands a pitiful once in a year. This is dangerously slow. This means that most money is sitting idle in bank accounts and almost never creates an economic transaction. This causes the need to create more money to make up for the money sitting stagnant. In Australia, we say something is as slow as watching the grass grow. But grass is faster than money. You would mow the lawn twelve times before you saw money move. It is like watching paint dry. But the paint would have dried and faded before the money moved. But, rather than ensure that money moves, the prevailing wisdom of those that talk with slow confident voices at the Central Bank is to attempt to get the public to borrow money into circulation and take on more debt to their masters, the banks.
Maintaining the ‘Money Supply’ at an adequate level is the supposed task of the Central Bank. Their slow confident voices give the impression that they are in control. But they are missing out on an obvious feature. They see their task as ensuring an adequate Money Supply to keep the economy buoyant. They do this by adjusting interest rates in the hope that people will borrow more or less. But there are two ways of keeping it buoyant and they only adjust one of them. It is rarely successful, but they put on a good show for the media, and the media follows like baby ducks.
In a modern economy, money needs to exist and it needs to move. The clowns at the Central Bank carefully monitor the volume of money on the ‘Money Supply’ and adjust the interest rate to give the illusion that they are doing something to encourage borrowing with the aim of lifting the volume of lending and thus the Money Supply. But it is not necessary to increase the Money Supply when simply making money move a little faster has the same effect. Economic activity is measured in a clumsy way as the Gross Domestic Product. If this falls or fails to steadily increase, we say we have a recession. A severe recession is called a Depression. But GDP has a simple mathematical formula. The GDP equals Money Supply times velocity. Fairly obviously, GDP can thus be riased by increasing Money Supply or by increaseing the Velocity. Economic activity depends on how much money exists (Money Supply) and how often it changes hands (Velocity). Economic activity depends on money being spent. Thus, to rid a recession is to increase the volume of money or to make it change hands more frequently. To a simple person, to increase ‘economic activity’ it is necessary to increase ‘economic activity’. An oxymoron, maybe, but one that eludes economics students. Thus business should not be hampered in their activities and money should not be removed when it moves. Money should be removed as tax when money it is stationary.