"Monetary theory is a dangerous thing", he smiled and continued, "Many researchers are sucked into it, but never get out: they never produce anything." Such is the warning from one of the smartest theorist in the department.
Money is always intriguing. Economists spent decades to understand why people exchange real goods for a piece of paper with no intrinsic value. Now it seems that we have a rough ideas: money arises to solve the problem of double coincidence of wants: I have something that you want but you don't have something that I want, so you give me money so I can buy it from a third person. But "it is a theory for money one hundred years ago". He exclaimed. "We now have credit cards, bank accounts, stock mutual funds. We are in an essentially cash-less economy."
I agree. Modern monetary policy suggests that a record keeping device, say a computer, can also solve the problem of double coincidence of want. In Kocherlakota's words, "Money is memory". In other words, anything has memory can be money. Instead you give me money, the computer debits your account balance and credits mine. No money changed hands.
So economists in the 20th century have to include bank deposit as money, which their ancestors in 19th century were quite hesitant to do. Now, technology advance allows you to buy coffee with your mutual funds (Although it has to be a special type of funds call money market funds). Do you count mutual funds, stocks, bonds and even houses as money?
This is not a purely philosophical question out of pure curiosity. It is practical. Understanding how money works is the first step to understand how monetary policy works. The central question is how the central bank controls interest rate. It is notoriously hard to control price, let alone the most important price in the economy, interest rate.
"Money is beyond any single man's comprehension." He concluded. But I disagree. Economics is a not a rocket science. It is a worldly philosophy. There is nothing deep here: people make simple decisions based on cost and benefit. That is it. I believe with careful thinking and rigorous reasoning, one can come up with a theory, like David Hume's "Of Money" and "Of Interest". Moreover, we have the bless of modern information technology. It would not be hard to test our theories with plethora of data.
Let me end with a quote from Hume. It refutes money agnosticism by its power of reasoning:
"Were all the gold in England annihilated at once, and one and twenty shillings substituted in the place of every guinea, would money be more plentiful or interest lower? No surely: We should only use silver instead of gold. Were gold rendered as common as silver, and silver as common as copper, would money be more plentiful or interest lower? We may assuredly give the same answer. Our shillings would then be yellow, and
our halfpence white, and we should have no guineas. No other difference would ever be observed, no alteration on commerce, manufactures, navigation, or interest, unless we imagine that the color of money is of any consequence.”
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