ABSTRACT
Monetary theorists have for many years been, accustomed to proceed on the assumption that the fundamental nature and properties of money can be assumed to be known and agreed from the facts of experience, and to construct on this basis theoretical models which pay scant if any attention to the rationale for the incorporation of money and the theoretically correct way of incorporating it. Recently, however, monetary economists working in different areas have come to appreciate that the role of money in the economy is theoretically more complicated than appears at first sight, and have been grappling with the problem of formulating this role in a theoretically satisfactory fashion. Specifically, the new interest in the fundamental nature of money has appeared in three contexts. First, controversy has arisen over my suggestion that the utility yield on money balances should be included, in addition to the capital gains created by the growth of the real money stock, in the concept of income employed in the construction of growth models incorporating money and designed to investigate the influence of alternative monetary policies on the characteristics of the long-run equilibrium growth path. 1 Second, international monetary economists have encountered the problem of the social saving accruing from the use of credit rather than commodity money, and the problem of optimal distribution of the ‘seigniorage’ earned by the creation of new international credit money, in connection with the analysis of alternative plans for international monetary reform. 1 Third, Boris Pesek and Thomas Saving, in an important new book 2 have argued – correctly as will be shown below – that the distinction introduced by Gurley and Shaw 3 between ‘inside’ money and the ‘outside’ money employed in Patinkin’s analysis, 4 the former in contrast to the latter involving no net wealth for the community as a whole, is incorrect, and that, provided that money is defined to be non-interest-bearing, both types of money will constitute net wealth for the community. Unfortunately, however, the Pesek and Saving analysis of the role of money as wealth is seriously flawed by a propensity to reason by analogy from current production and consumption flows problems to problems of stock equilibrium, and contains serious analytical errors deriving from their mistaken belief that wealth must be identified with the capitalized value of an income stream objectively measurable by a price-quantity product observable in the market, and their failure to appreciate and apply to the problem the relevant theory of free goods.
