Comments on Economics and Politics: The dispute about the true money supply

nima,Yes, and in order for this good to be acquire...

2008-05-03T23:49:00.000-07:00

nima,

Yes, and in order for this good to be acquired by people for later exchange, it has to be accepted by everyone in exchange, right? ...

Almost.

I will hold something as money if and only if I expect that there is a high probability that the goods and services for which I will need money for time-critical purchases will be available in exchange for that something.

Any non-time-critical purchases can be accomplished by converting any assets to whatever is needed for exchange at the time, money or not.

Regards, Don

Yes, and in order for this good to be acquired by ...

2008-05-03T20:29:00.000-07:00

Yes, and in order for this good to be acquired by people for later exchange, it has to be accepted by everyone in exchange, right? ...

nima,From HA, page 434 of 950.http://mises.org/Boo...

2008-05-03T18:27:00.000-07:00

nima,

From HA, page 434 of 950.

http://mises.org/Books/HumanActionScholars.pdf

"A medium of exchange is a good which people acquire neither for
their own consumption nor for employment in their own production
activities, but with the intention of exchanging it at a later date
against those goods which they want to use either for consumption
or for production.

Money is a medium of exchange. It is the most marketable good
which people acquire because they want to offer it in later acts of
interpersonal exchange. Money is the thing which serves as the generally
accepted and commonly used medium of exchange. This is
its only function. All the other functions which people ascribe to
money are merely particular aspects of its primary and sole function,
that of a medium of exchange"

Regards, Don

OK, lets get back to that question again: What is ...

2008-05-03T15:11:00.000-07:00

OK, lets get back to that question again: What is your definition of money?

Nima,How does the 1st National Bank account for th...

2008-04-24T13:20:00.000-07:00

Nima,

How does the 1st National Bank account for the checking money they receive after clearing the check through the clearinghouse?

They must be adding it to their demand deposit balance in order to balance it out against the cash money they have advanced, even in your scenario. If they didn't do that then they would be handing out free money.

In the simplest case, a bank that cashes checks only needs teller drawers and a vault to hold actual money. There is no demand deposit balance involved. The bank has its own money in the vault and it comes out of the vault to cash checks, and the money returned from the clearinghouse goes back into the vault. It only needs to be counted, not accounted for.

The only thing that I can see questionable in your definition of money is interpretation.

As I noted before, Final Payment should mean the point of exchange of goods for the medium of exchange. The fact that, in abnormal cases, the payment or the good may turn out to be defective
has no impact on money itself.

The difference between money and any other asset is on the consumer/customer side, not the merchant side.

As Mises notes, there would be no demand to hold money if the future were not uncertain. If you know all the times and amounts of future purchases in advance, you would loan out all your money, holding none, and schedule the maturities of the loans so that they are repaid just-in-time.

If my car breaks down in the sticks, I want to have enough cash in my pocket to pay a tow truck driver, not wanting to risk that he will not accept a credit card or some other alternative.

I'll stop here to see where we are.

Regards, Don

Don,How does the 1st National Bank account for the...

2008-04-24T01:05:00.000-07:00

Don,

How does the 1st National Bank account for the checking money they receive after clearing the check through the clearinghouse?

They must be adding it to their demand deposit balance in order to balance it out against the cash money they have advanced, even in your scenario. If they didn't do that then they would be handing out free money.

In either case, I think this is besides the point of our initial conversation.

My main point was: I don't include savings deposits in the money supply because they don't pass the criterion of acceptability in payment transactions which is the definition of a money. This is the very premise I am starting out with.

People who have both savings and checking accounts don't accept payments that are credited to their savings account balance.

Before I continue, in order to be sure we are on the same page: What is your definition of money?

Nima,I believe that your description of what happe...

2008-04-24T00:19:00.000-07:00

Nima,

I believe that your description of what happens when a check is cashed is slightly, but significantly, misleading

When the 1st National Bank cashes a check written by a depositor of the 2nd National Bank, it doesn't care if the check is covered or not. It returns the endorsed check to the 2nd National Bank through a clearinghouse, and expects repayment in return. (More likely, it expects a credit for the net of checks that it cashes minus the checks cleared against it). The returned check is repaid, bank to bank, through the clearing system, independently of whether funds are available in the depositor's account. If the account is overdrawn, it need only be a matter between the checking account depositor and HIS bank. Only one checking account is required to be involved.

Once a check is cashed, all of the remaining activity is bank to bank, through the clearinghouse.

Now, the above is only an attempt to demonstrate that no checking account is required to cash a check. It may well be incorrect in detail. In practice, a business is likely to have some kind of bank account and will deposit its received checks, not cash them. Then, the details may vary, but the fundamental point is that no merchant checking account is necessary for the merchant to accept checks as money.

The purpose, or demand, for holding money, is satisfied by a checking account if the merchants involved in an uncertain future can be reliably expected to accept checks. If that is true, it makes no difference what the details of the check clearing are. Checking account balances will serve the purposes of money.

Regards, Don

Don,The bank who cashes the check will still inqui...

2008-04-23T23:21:00.000-07:00

Don,

The bank who cashes the check will still inquire as to whether or not the issuer of the check has sufficient checking account dollars in his account. They will then request a transfer from the issuer's account to their business account and then turn that checking account money into cash money in order to make it available to the worker.

Someone has to have a checking account on the receiving side, otherwise the transaction could not be facilitated.

Best regards,
Nima

Nima,If the merchant has no checking account then ...

2008-04-23T01:17:00.000-07:00

Nima,

If the merchant has no checking account then how will he accept checks as a means to transfer money?

The same way that any worker would cash a paycheck. Walk into a bank branch, sign the back of the check, and walk out with a wad of cash. Depending on the details of the situation, it might not be so simple or immediate, but the moneyness only depends on the pre-transaction situation. It is nearly always in the merchant's interest to not turn away business transacted by a check that is highly likely to clear routinely.

I do not understand your concern with how the post transaction processing occurs.

Regards, Don

Don,What do you mean by "There is no necessary req...

2008-04-23T00:48:00.000-07:00

Don,

What do you mean by "There is no necessary requirement that the merchant even has a checking or a savings account."

If the merchant has no checking account then how will he accept checks as a means to transfer money?

If no merchant had a checking account, checks would not be accepted as a common means of payment, and checking deposit dollars should not be considered a part of the money supply, should they?

Isn't it precisely the fact that checking account dollars emerged as a commonly accepted final means of payment, that they became money, a common medium of exchange? (It is important to note that this has not always been the case, I would have made the same case against checking accounts back in the 18th and 19th century as I am making now for savings/NOW accounts.)

Best,
Nima

Nima,I would argue that the final payment, for the...

2008-04-22T13:41:00.000-07:00

Nima,

I would argue that the final payment, for the purpose of defining money, occurs when the buyer transfers money or an unimpeachable claim to money, to the merchant, largely independent of what happens to it subsequently. There is no necessary requirement that the merchant even has a checking or a savings account.

Regards, Don

Hi Don,thanks much for your interesting comment.I ...

2008-04-22T12:02:00.000-07:00

Hi Don,

thanks much for your interesting comment.

I do a gree that a merchant will accept a check written against a NOW account in order to facilitate a transaction.

However, my main question would be: Does this mean that he accepts NOW-account-dollars as final payment? Meaning, would he be willing to enter into a transaction where the dollars actually arrive in his savings account rather than his checking account?

Nima,Your precise logic is very impressive, and yo...

2008-04-22T11:31:00.000-07:00

Nima,

Your precise logic is very impressive, and your conclusions seem well supported.

My only question is one of fact, dealing with NOW accounts.

I lived in Massachusetts in the early 1970's when the first NOW accounts came into existence. Although my memory is highly suspect at this point, it is my belief that NOW accounts were actually the checking accounts of the Massachusets banks of that era. There is no hint in my mind that the NOW account checks were not every bit as accepted by merchants as those connected to a traditional checking account.

AFAIK, I have not had anything called a NOW account in decades, so I can't usefully speak to the present.

The point seems to be that a NOW account doesn't necessarily imply a savings account, but may be either a checking or a savings account.

In fact, I have a checkbook for my SchwabOne investment margin account, and I seriously doubt that a one of these checks will be less acceptible to a merchant than a check from some small out of state bank that he has never heard of. Nevertheless, I don't treat this account as money.

In additional fact, my bank checking account is functionally only still money to me because its checking/debit card is accepted by supermarkets. The only checks that I write anymore are for taxes.

Regards, Don