With a massive deficit and a crippling recession afoot, I think it’s helpful to consider the nature of money. If you’ve a passing familiarity with the field of economics, much of this will likely be remedial, but I find it useful to refresh every now and again, as money can become a concept rather divorced from itself in the face of heated debate. If you’re new to the subject, I hope this will be illuminating.

What is Money?

The simple answer is, money is what we make of it. There are some fundamental precepts money must follow, but these are largely driven by perception, even when dealing with ‘hard money’ such as silver and gold. More broadly, Money has three basic purposes:

1. A medium of exchange: Money facilitates trades between different parties
2. A unit of account: Money allows different goods to be valued on a common scale
3. A store of value: Money allows individuals to enact different halves of a trade at different times.

The two most important properties are the first and third: a medium of exchange and a store of value. They also conflict with one another: As a medium of exchange, an ample money supply is a virtue, whereas a store of value relies fundamentally on scarcity. In the face of the current political climate, I’m not sure the latter value needs much defense: the dangers of inflation seem well represented in the ideological forum these days. I’ll therefore focus on the former, whose prerequisites seem sadly bereft of popular support at the moment.

Money as a Medium of Exchange

In a barter economy, trade is neccessarily symmetric, which means if someone who has an item you want doesn’t want any of the items you have, you cannot affect an exchange. Likewise, if someone else wants an item of yours, but has nothing you want, the exchange cannot be executed. What’s needed is a third, intermediate good, which can facilitate these trades. Historically, the first solution to this problem was debt: Bob is owed three ears of corn by Sally, an obligation he can pass to another in exchange for other goods. This system of debts, however, requires either good relationships or good bookkeeping (the first use of written language), and a closed system in either case. Money, originally a common commodity such as shells, allows traders to carry their debts and credits between systems: as long as the currency of choice is recognized in two different markets, trust relationships are not required to carry over between the two.

However, by electing a commodity as our medium of exchange, we now need enough of that commodity to facilitate whatever trades we want, and herein lies the rub: if I want to buy three ears of corn from a man who wants to buy a loaf of bread, and six shells is the generally accepted value of both three ears of corn and a loaf of bread, and only three shells are available in the market, I can’t obtain the corn and the other man can’t obtain the bread, regardless of the virtue of the trade.

In short, a shortage of money restricts all trade, regardless of willingness, mutual benefit, societal advantage, or relative availability of resources.

Since money and trade are fundamentally expressions of value rendered (I value the man who gives me corn as much as he values the man who gives him bread), the amount of trade that can potentially be transacted in a market is a direct function of the overall value which can be rendered by all members of the market. This, in turn, is a function of population and skill level of these people and the resources available to them. For money not to restrict trade, there must be enough of it available to fully represent all the value which can be rendered by all the people in an economy. Money supply, then, must trend with population (typically up), productivity (hopefully up), and resource availability (a mixed bag). In general, we need a positive growth rate of money. This is why true hard or fixed currencies can be a significant drag on an economy: The population may grow, the skill level may increase, but if there’s not enough money to go around, we can’t reap the full benefits of societies’ members.

But You Don’t Trade in Shells

And neither do I - I trade in dollars, and we need more of them in the market. Currently, we have a 9% unemployment level, a 3% rate on 10y bonds, and short-term inflation that functionally doesn’t exist. By every impression, we have a real economy that’s short on currency: 9% of the population wants to work (and 20% wants to work more), there’s practically zero concern about default risk on treasury bills from the actual market, and no sign whatsoever of anything that looks like an overheated economy - in fact, we’ve got a raft of skilled people sitting around twiddling their thumbs. Our GDP growth rate might be positive again, but we’re 3% below the long-term trend, which means there are 3% more transaction that could be realized in the economy than currently are. We have massive amounts of value that could be released in the economy but that sits around for want of money, a commodity whose quantity we control outright.

But we’re not arguing about how to jump-start the economy or how to get money into the hands of people who need and will spend it - we’re arguing about the deficit and how to remove even more money from the economy. Money is the lifeblood of the economy: Our patient took a bullet and right now we’re arguing how much more we should bleed them before they start to feel better.