The Story of Money: The Intricacies of Money Supply

I started this series by emphasizing that money is rather simply a measure of value than having intrinsic value itself. (Episode 001.) Later, in Episode 017 we looked at the dynamics of supply and demand. Let’s now look at the interplay of these with money itself.Specifically, when we talk about supply and demand, it’s with regard to, in this strict sense, the items we want or can offer in exchange, and not the measure itself. Can there be such a thing as ‘too much money’ in the economy? Too little? What are the repercussions of either? Especially now that we have clearly categorically distinguished between ‘money’ and ‘wealth’ in the previous episode.Let’s go back to the metaphor I offered there to depict this: that money is like the measuring tape rather than any actual tailoring. If a tailoring team completes 5 suits a week, there might be a need for, say up to 5 tapes in the course of working on those suits, perhaps 10, two for each. (Note to professsional tailors, this is just an example, tailor-made for non-tailors by a non-tailor!)So as in the example last time, if a tailor hoards several dozen tapes while still at 5 suits at any time, what’s the point of all those tapes? In quite the same way, the amount of money - the money supply in an economy must reflect the real economic output, the value being created, to measure it adequately. Simply jacking up by printing lots of cash simply recreates this tailor-made problem across the economy.Similarly if there is only one tape that has to go around managing 5 suits being worked on by the team, it’s not hard to see how it slows down the work. Everyone’s fighting to get their hands on that one tape. So correspondingly, a fall in the money supply can have severe repercussions.Like There’s no TomorrowMost of us might have a sense of what happens when there’s too much money chasing the same goods - inflation, and as we saw in the very first episode, when governments overdo this, hyperinflation. We instinctively know that inflation is undesirable, you don’t want to see the price of goods in the supermarket keep climbing every day you’re out shopping.But deflation, the opposite phenomenon, can have its problems too, in particular in raising the costs of servicing a debt. We will dedicate specific articles to each of these to be explored in their own right.And more broadly, the question of money supply has had such rigorous research and debate that a lot more can be said later on at a more advanced stage of this series, which is some way off. But even before we get into the depths of Monetarism and monetarist policies, terms we routinely hear in the news, I may add that a huge part of the focus and attention of Central Banks, the banks that print money in an economy, has come to be dedicated to controlling the money supply.After the 2008 financial crash, the term quantitative easing was thrown around quite a bit. Quite simply it referred to printing tons of money to alleviate the damage done by developments such as the credit crunch that followed the sudden loss in trust. Some commentators bemoaned that central banks were printing money like there’s no tomorrow. But the counterargument is that it was this that stopped a repeat of the Great Depression, at which point there was a severe drop in the money supply. So regulators and authorities did learn something from that catastrophe, and we may say, didn’t repeat those mistakes.The Pain in SpainI will in due course have a lot to tell about these two recent crises, but for now, keeping it simple, let’s look at that older case which I presented in the last episode as the classic case of getting this wrong, that being perhaps the most dramatic case in history.The Spanish crown, among other kingdoms in the vicinity, back in the 1400-1500s were hugely motivated in their explorations by the lure of gold and silver. And silver they did eventually find, even a whole mountain of it in South America, which they extracted with brutal consequences to the local population and the environment, and shipped them over to Spain. So suddenly, there’s a lot more silver in Spain and in Europe more widely. But here’s the thing, there was no corresponding increase in the industry or production within the Spanish economy. So just as in the above analogy, that silver now meant much less, and there was inflation.It’s one thing to think that conquered peoples invariably suffered, being subject to forced labor in very toxic conditions to extract that silver, which the indigenous populations in the Americas did have to endure, but the ordinary people of the ‘conquering’ nation saw their lot worsen as well. Let’s take an example (these figures are only representative): say an ordinary peasant in Spain would pay one silver coin to purchase his weekly supply of food and other essentials. With that rampant inflation, the price of the same goods shoots up to 5 silver coins. But the peasant’s wages are the same, he still has only 1 silver coin at hand for the same goods.We cannot change the past. And as I said last time, these early explorations had other motivations too, but can we say the lack of an understanding of basic economics was a significant factor in the misery that ensued on both sides. They say charity begins at home. Economics also begins at home. We each have to first seek to understand such basic economic ideas and apply them in our own lives before we expect our public institutions to properly do so?Article written by Ash StuartImages, video, voice narration and some footnotes generated by AINothing in this presentation constitutes as advice - financial, investment or otherFurther Reading & Reference* The Fifth Sun (A history of the Aztec conquest based on indigenous sources) This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit ashstuart.substack.com