A great piece I discovered with a summation on Economics.
Scroll to the bottom of the page in the link.
“There is a difference between money and wealth. Wealth is the capacity to satisfy the wants of people who have something of value that they are willing to trade for that satisfaction. Wealth resides in the world’s farms, forests, mines and fisheries, and in the complex web of transporters, processors, fabricators, distributors and retailers that turn raw materials into finished and intermediate goods and offer them for sale in convenient locations and at a moment’s notice. Wealth also resides in the less-tangible but equally real capacity (tools and expertise) to provide a desired service to a satisfactory standard of performance, and in a timely fashion.
Money is to economic activity as motor oil is to an engine. Its role is to reduce friction so that the many moving parts can function without generating excessive heat and wear. It serves as a temporary storage medium for wealth, and as an efficient means for converting one form of wealth into another. That’s all. Money does not have and does not need to have any intrinsic value. The one and only thing that money absolutely must have in order to serve its lubricative function in the economic engine is the confidence of (almost) all buyers and sellers that its value will be reasonably stable for a reasonable period of time. When that confidence disappears, economic activity reverts to barter, which is exceedingly cumbersome and inefficient.
”Like oil in an engine, there can be too much or too little money in circulation. The “right amount” of money is the amount that exactly matches the needs for today’s transactions to move real goods and services from producers and providers to users and consumers. There is no necessary relationship between the right amount of money to have in circulation in the world’s economy and the amount of gold or other precious metals that may exist in the world, whether as refined bars in a vault or as ore still in the ground. Precious metals are valuable for a variety of reasons to a variety of people, but they are not money, they are commodities.
The rate at which goods and services are produced has a necessary inertia built into the process and can’t change too suddenly. If the amount of money increases faster than the rate of production and consumption, a larger number of dollars will be divided up between a lesser amount of actual value created, so the price per unit of value has to go up. That’s inflation. If the amount of money is increased slower than the rate of production and consumption, some transactions are delayed, inventories build up until the cost of holding them begins to be burdensome and sellers must reduce prices in order to move product. That’s deflation. If producers have to reduce prices below a profitable level, they will reduce production levels for awhile. That’s recession. If the reduction in the rate of production and consumption is large enough and persists long enough, many producers will go bankrupt. That’s depression.
”The role of the central bank is to dispense the “right amount” of money to properly match the rate of production and consumption in the economy. If they get it right, there is an acceptable degree of (not perfect) price stability, without recession or depression. Of course they occasionally get it wrong, sometimes knowingly, but more often out of ignorance or incompetence.”
