How much wealth a country must possess in monetary form is a question which arose only after the world gave up the gold standard. Nobody asked that question before simply because money and gold remained synonyms and mutually convertible with ease during the gold standard regime. But thereafter indiscreet issue of paper currency without adequate currency reserves brought up for discussing the quantity of money as well.
Since money acts as a medium of exchange for marketing goods and services, the quantum of marketable goods and services determines the quantum of money needed for their exchange. The current total value of total marketable goods and services needed by a country at present can be determined by the statisticians after collecting necessary data. The figure so obtained will represent the purchasing power required by that country at present.
The national purchasing power is evidently a product of two factors-the market value for the country's monetary unit multiplied with the quantity of those units required to meet all the exchange needs of the country. This fact can be expressed mathematically in the form of an equation-P=MxQ-where P denotes the total purchasing power of the country, M denotes the market value of the monetary unit of that country, and Q denotes the quantity of these units required for all exchange purposes. With constant P any change in M or Q is bound to produce a proportionate adverse change in the other. If the market value of your monetary unit is reduced to half, you will need twice as many units as before, and if the market value of your monetary unit is doubled, only half the existing units will suffice to meet the country's exchange requirements. This equation implies that for any genuine increase in P, proportionate genuine increase either in M or Q or both is necessary.
This equation also explains the spread of inflation due to deficit financing after giving up the gold standard. Increase in the quantity of money by printing currency notes without adequate increase in the currency reserve always reduced the market value of the monetary unit proportionately.
Since national purchasing power is a genuine form of wealth, like all other forms of real wealth it can be increased only by creating additional wealth through the application of genuine productive efforts. All other make-believe gadgets are futile.
Deliberations over the quantity of money reveal some basic truths of grave importance about the monetary system. Since they deserve everybody's attention, they are recorded below.
1. The universally accepted practice of using paper currency as substitute for real money demands a cautious approach as it has already proved to be treacherous. To forestall its treacherous behavior is the first economic responsibility of any state.
2. As money is a genuine and not a mere make-believe form of wealth, any increase in it can be made only by first producing real wealth from natural resources and then converting it or some already existing real wealth into the monetary system i.e. by increasing the currency reserve with real wealth first, and then printing currency reserves of an equivalent worth. Without a proportionate increase in the currency reserve, printing and circulating paper currency is fraudulent and an act of treason.
3. To restore public confidence in the national paper currency the state must publish weekly statements of the currency department of the Reserve Bank or money issuing institution of the state. These statements must disclose full details of the constituents of the currency reserve.
4. Fall in the market value of one's currency is a signal of something going wrong somewhere. The state authorities should respond to such signals promptly and take appropriate remedial measures.
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Economics Article FeedFind More ArticlesSearchSimilar ArticlesSecession and The Gold StandardA Return To a Gold Standard Currency?Money, Gold and the Gold StandardThe Economic Role of Gold: A Brief Essay on How Gold Has Shaped Our EconomyHistory of Previous European Currency UnionsHow Gold Affects the Forex MarketGold - A "Bridge Over Troubled Water"Money: Gold and Silver, or Paper and Plastic?Gold Investments - Will Gold Continue to Rise?E-Currencies and Money Part 3 - Money, Investment, Payment System, Or All of the Above?Recent ArticlesHow To Solve The Homeless SituationProgressivism Isn't Progress, VIIIHow Secure Is Your "Secure" Job?A True Comparison Of Increasing Debt Between Bush And Obama AdministrationsHow To Compete With ChinaWould Einstein Think Us Insane?What Will Happen If Greece Defaults?A Cluster of (Minor) ErrorsThe US Recovery Is Producing SurprisesA Sigh Of Relief For The Economic Status Of The USSubmitted On January 07, 2012. Viewed 9 times. Word count: 614.MLA Style Citation:Shaikh, Waleed K.".".7 Jan. 2012EzineArticles.com.26 Jan. 2012
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