While money’s purpose is to serve as a medium of exchange, this is not its only function. Samuel Gregg, in an article for Witherspoon Institute’s Public Discourse, defines the purpose of money and finance, in general, as well as its ability to serve the economy of the people. This is where it finds its good. In this article, Gregg is concerned with the ethics of money in our modern capitalist climate and finding policy solutions to utilize money ethically, as well as educating the general public on the purpose of money. Gregg acknowledges that common problems and criticisms concerning money in modern capitalist economies cannot be overlooked, but considers the real problem to lie in the”financial industry” itself, rather than money. He says:
Certainly, the purpose of money and finance more generally is to serve the real economy. Money makes no sense outside the world of supply and demand. It’s also true that many of the problems characterizing modern capitalist economies owe much to dysfunctions in the financial industry. That’s why we call the economic upheavals of 2008 a “financial” crisis.
In order to escape the financial chasm modern capitalist economies have found themselves in, Gregg calls for a return to “good money,” addressing the multi-faceted purpose of money and the function of government in its operation:
. . . I would suggest that a return to what I will call “good money” necessitates serious rethinking of the role of government institutions vis-à-vis money. Herein lie the roots of significant problems in many economies today, the reasons for which become more apparent once we appreciate money’s multiple purposes and functions.
The first lesson in any textbook about money is that its most basic function is to be a medium of exchange. Money serves as a proxy for the value of real goods and services, which are objects of economic exchange. This, however, allows money to perform three other functions: a store of value through time, a unit of account, and a standard of deferred payment.
Gregg recognizes the complicated nature of money. Although achieving a truly neutral currency may be impossible, stability in currency is key to solving financial problems and this can be done through supporting ‘neutral’ money supply policies.
. . . it’s important that monetary stability prevails. This involves stability in (1) the purchasing power of money; (2) the relative value of a currency compared to other currencies (the exchange rate); and (3) the opportunity cost with respect to amounts of money available in the future (i.e., interest rates).
Monetary stability in all three areas spurs productivity and investment because it gives individuals and businesses the confidence that the prices of goods, services, labor, and capital will remain relatively constant and predictable over time. Monetary instability, by contrast, undermines this assurance and makes people wary of investing. For consumers, monetary instability undercuts their ability to distinguish what they find marginally preferable in the marketplace from what they find marginally inferior. This makes it harder for consumers to align their available resources with meeting their needs and pursuing their wants over extended periods of time.
. . . we need monetary policies that prevent monetary stability from being undermined, especially by disturbances emanating from the money supply itself. The primary and long-term goal of monetary policy should thus be to keep the supply of money as “neutral” as possible.
Gregg concludes by stating that although monetary policies may be difficult to achieve, to begin any sort of implementation of a proper solution, we must get to the root and purpose of money:
Much more could be said about the ways in which our contemporary economic challenges are being facilitated by questionable monetary policy. How all this will end is an open question. But if we are going to fix these problems, we need to recall what are money’s core functions and purposes, and what are not. That is the path to good money—and a sounder economy.
To read the full article at Public Discourse, click here.
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