The money supply is the total value of all money available in an economy at a given point in time. There are several ways to define “money”, but standard measures usually include currency in circulation and deposits in banks. A central bank may use its own definitions of what constitutes money for its purposes. This may even include your birth certificate!

Scarcity value and cryptocurrency

Scarcity value is the relationship between how much of something is available and its value. So, in general the empirical result of this relationship is that, as the availability of a commodity1 rises, then its value decreases. Bit-coin and all cryptocurrencies exploit only the scarcity value of virtual money. Despite Sméagol-gollum sales people and endless mindless pundit’s waffle on this, the truth is that all forms of cryptocurrency have no intrinsic value whatsoever. This results in money which is backed by absolutely nothing and which is necessarily the most volatile monetary system of all.

Ergo: cryptocurrency is fiat money in possibly the worst form possible.

Origins and development

The quantity theory descends from Nicolas Copernicus, and various others who noted the increase in prices following the import of gold and silver, used in the coinage of money, from the New World. (the exploitation of the Americas) The “equation of exchange” relating the supply of money to the value of money transactions was stated by John Stuart Mill who expanded on the ideas of David Hume. The quantity theory was developed by Simon Newcomb, Alfred de Foville, Irving Fisher, and Ludwig Von Mises in the late 19th and early 20th century.

Central banks

Henry Thornton submitted the idea of a central bank after the financial panic of 1793, although, the concept of a modern central bank was not given much importance until Keynes published “A Tract on Monetary Reform” in 1923. In 1802, Thornton published An Inquiry into the Nature and Effects of the Paper Credit of Great Britain in which he gave an account of his theory regarding the central bank’s ability to safeguard price level. According to his theory, the central bank could inspect the currency in circulation through book keeping. This inspection could allow the central bank to gain a command of the money supply of the country. This ultimately would lead to the central bank’s ability to safeguard the price level. His introduction of the central bank’s ability to influence the price level was a major contribution to the development of the quantity theory of money.

Karl Marx

Karl Marx amended the established theory on money supply, by arguing that the labor theory of value requires that prices, under equilibrium conditions, are determined by the labor time needed to produce the commodity and that quantity of money was a function of the quantity of commodities, the prices of commodities, and the velocity. Marx did not reject the basic concept of the Quantity Theory of Money, but rejected the notion that each of the four elements were equal, and instead argued that the quantity of commodities and the price of commodities are the determinate elements and that the volume of money follows from them. He argued that:

The law, that the quantity of the circulating medium is determined by the sum of the prices of the commodities circulating, and the average velocity of currency may also be stated as follows: given the sum of the values of commodities, and the average rapidity of their metamorphoses, the quantity of precious metal current as money depends on the value of that precious metal. The erroneous opinion that it is, on the contrary, prices that are determined by the quantity of the circulating medium, and that the latter depends on the quantity of the precious metals in a country;this opinion was based by those who first held it, on the absurd hypothesis that commodities are without a price, and money without a value, when they first enter into circulation, and that, once in the circulation, an aliquot part of the medley of commodities is exchanged for an aliquot part of the heap of precious metals.

A more contemporary viewpoint

So, a more contemporary viewpoint on money supply and value might be:

  1. The quantity of money available is inversely proportional to the value of money
  2. The value of a monetary note, coin or other instrument is immediately determined by the amount of interest that has been already paid upon that instrument. In other words, a coin in your pocket has a value only because it has been borrowed and interest is paid upon that borrowing.
  3. Lowering interest rates has been used by central banks as the primary method of safeguarding the quality of money supply for decades, since most of the money in supply is not in a tangible form but rather is simply numbers in accounts.
  4. It is notable that even at zero percent interest the above mechanism of safeguarding money supply no longer functions well. This, in part, is due to tightening of the borrowing requirements to the extent that Banks may not lend to you when you do not have securities to cover the total borrowing.
  5. All fiat money suffers from a need for exponential growth in monetary supply in order to pay for the interest upon the current money supplied.
  6. As newer mechanisms are found by the stock-market industry to create drastic levels of new money using systems such as Securitization and Derivatives, it becomes increasingly difficult for any Central bank, state or union of states to know how much money is actually flowing or in circulation. This is true because Derivatives are most often traded Off-the-books, such that the agreement is not recorded by a third party or regulated by anyone.
  7. This system is similar to a CASINO, and is certainly the most ridiculous manner with which to run any economy or the whole world.
  8. A ‘normal’ outcome of the failure of capitalist money and its money supply is war. War provides an excuse to tax the poor, it murders huge numbers of innocent people and it uses arms which are expensive, thus making the arms manufacturers rich and those who hold shares in these companies of highly questionable moral compass.
  9. It must be noted that COVID19 may have been used in place of a traditional war. In this scenario the IMF WHO and World Bank solve the massive exponential need for more money by gifting or doling out money in a magnitude of $trillions to the Central banks and also huge corporations and other massive financial players. It may be that over three hundred trillion dollars ($300,000,000,000,000) have been doled-out to Banksters in this way.
  10. Karl Marx could not have predicted artificial intelligence nor the existence of completely mechanised factories. So necessarily, an amendment of his conclusions on labour and its relationship with the value of money must be made. We cannot simply remove the cost of labour, yet we must adjust the relationship it has with the value of money. It still holds true for say moving production to the far east, where labour is less costly. However, in a world with zero need for labour, the Capitalist owner has a big problem, since in such a scenario, nobody is needed and therefor nobody is paid for production of anything, then it follows that most people would then have no money to buy his/ her products. This then results in zero profit for the capitalist. We can get round this problem by doling out money to the jobless for a while. We may also ‘help’ the Capitalist by gifting him with large lumps of money.
  11. None of the above avoid the inevitable problem: The current form of global-capitalism is totally dysfunctional and inadequate.

Footnotes


  1. Well, actually, by definition, money is a commodity. That’s why it was developed in the first place, to combat the inability to trade unlike skill sets or goods in barter. Just like any other comodity, the price or value of any money may go up or down from time to time. ↩︎