THE DEMAND FOR MONEY
Money is any asset that is widely used as a medium of exchange. People want to hold money since it
simplifies their current or future transactions. Since the nominal value of money is always known
with certainty, it is a very safe and liquid asset, unless there is a very high rate of inflation. Therefore
holding money protects asset holders against potential capital losses on riskier assets.
In a society in which there was no money, all trade would be completely based on barter. But barter is
fairly inefficient, since suppliers of goods and services can't always find people who are both in need
of the goods and services being offered and willing to trade something of value to the suppliers.
Therefore, sooner or later, some form of money has to be invented to facilitate trade. A good example
of a money substitute is U.S. cigarettes, which were used as medium of exchange during the
hyperinflation in Germany in 1922/23, in P.O.W. camps after World War II, and in some Eastern
European countries during the transition from command economies to more market-based economies
when people lost confidence in their own currencies.
It is easier to imagine a society in which there is no currency but everyone has a credit or debit
card. The cashless purchase of goods via credit or debit cards (or via e-commerce) is not only
convenient for customers but can also provide valuable information to sellers about the buying habits
of consumers (which is one reason grocery stores now willingly accept credit or debit cards). In a
cashless society all transactions would require electronic fund transfers through bank computers. At
the end of the month, all accounts would have to be settled with the company that issued the credit or
debit card, again through electronic fund transfers. This requires investment in computer technology,
not only for banks but also for merchants. Such a system may seem highly efficient, but it may not
work well for very small purchases, such as a magazine at a newspaper stand, a can of soda from a
vending machine, or a local phone call. However, financial institutions have already developed pre-
paid cash cards or phone cards that allow the purchase of smaller items or phone calls, with the
amount of the purchase automatically deducted from the card.
It should be noted, however, that a cashless society still requires money, that is, funds that can be
stored in accounts, whether these are traditional bank accounts used to settle outstanding bills or
accounts that exist simply for e-commerce. However, if pre-paid cash cards, debit and credit cards, or
e-commerce funds are used increasingly, monetary aggregates may have to be redefined.
3. One could certainly make an argument for including credit card limits as part of money stock, since