equilibrium price level will clear the market and equilibrate the
existing supply to the decreased demand.
On the other hand, if frequency of payment of salaries should
shift generally from once a week to twice a month,
the reverse
will happen. People will now need to carry a higher average cash
balance for their given incomes. In their scramble for higher cash
balances, their demand for money rises, as in Figure 3.6 above.
They can only raise their cash balances by cutting back their
spending, which in turn will lower prices of goods and thereby
relieve the “shortage” of cash balances.
Realistically, however, frequency of payment does not change
very often, if at all. Any marked change, furthermore, will only be
one-shot, and certainly will not be continuous. Frequency of pay-
ment is not going to go up or down every year. Changes in fre-
quency, therefore, could scarcely
account for our contemporary
problems of chronic inflation. If anything, the general shift from
blue-collar to white-collar jobs in recent decades has probably
reduced the frequency of payment a bit, and therefore had a slight
price-lowering effect. But we can safely ignore this factor if we
are looking for important causal factors.
3. C
LEARING
S
YSTEMS
On the other hand, there is another causal factor which can
only
lower
the demand for money over time: new methods of
economizing the need for cash balances. These are technological
innovations like any other, and will
result in a lower demand for
money for each successful innovation.
An example is the development of more efficient “clearing
systems,” that is, institutions for the clearing of debt. My eighth-
grade teacher, perhaps unwittingly, once illustrated the effect of
clearing systems on reducing average cash balances. In effect he
said to the class: Suppose that each of you owes $10 that will be
due on the first day of next month. If there are, say, 30 kids in
each class, each will need to come up with $10 to pay their debt,
The Demand for Money
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so that a total cash balance of $300 will be demanded by the class
in order to pay their various debts.
But now,
my teacher pointed out, suppose that each of you
still owes $10 due on the first day of next month. But each of you
owes $10 to the boy or girl on your left. More precisely: The
teacher owes $10 to the first kid in the front of the class, then
each kid in turn owes $10 to the kid on his left, until finally the
last person at the end of the line, in turn, owes $10 to the teacher.
Each of these debts is due on the first of the month. But in that
case, each of us can wipe out his or her debt all at once, at a sin-
gle blow, without using any cash balance at all. Presto chango!
The class’s demand for cash balance for repaying debt has been
reduced
as if by magic, from $300 to zero. If there were an insti-
tutional mechanism for finding and clearing these debts, we could
dramatically and drastically reduce our need for accumulating
and keeping cash balances, at least for the payment of debt.
Any devices for economizing cash balances will do as well as
clearing systems in reducing the public’s demand for money.
Credit cards
are an excellent current example. Contrary to some
views, credit cards are
not
in themselves money and therefore do
not add to the money supply. Suppose, for example,
that I eat din-
ner in a restaurant, run up a $20 bill, and pay by American
Express card rather than by cash. The American Express card is
not
money. One way to see that is to note whether using the card
constitutes
final payment
for the dinner. One crucial feature of
money is that using it constitutes final payment; there is no need
for any more. If I pay for the dinner with a $20 bill, for example,
that’s it; my debt has been canceled finally and completely. Hence
the $20 was truly money. But handing the restaurant my American
Express card hardly completes the matter;
on the contrary, I then
have to pay American Express $20, plus interest at some later date.
In fact, when a credit card is used,
two
credit transactions are
taking place at once. In the above example, American Express lends
me the money by paying the restaurant on my behalf; at the same
time, I pledge to pay American Express $20 plus interest. In other
words, American Express picks up my tab and then I owe it money.
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