An Historical Investigation
Chapter 11: Monetary Equilibrium
INTRODUCTION This chapter addresses the historical development of theories about monetary equilibrium. The definition of monetary equilibrium is one of the most controversial issues in economics. For most people, money and economics are synonymous, given that in real life virtually every economic transaction is conducted in terms of money. Whether it be in commodity, fiduciary, digital or plastic form, money represents purchasing power now and in the future and is thus an asset that people demand for transaction, precautionary or hoarding purposes. However, today economic science is still not able to fully integrate money and general equilibrium analysis, generally considered to be the theoretically most advanced part of our science. The reasons for this failure are not difficult to explain. The main problem is to explain why people demand money in equilibrium. Do we hold money as a precaution against unforeseen circumstances? In general equilibrium with a full set of forward markets nothing is unforeseen and money is a mere accounting unit. By the same token it would be foolish to hoard money for investment purposes, given that it bears no interest while other assets do. Hahn (1981) concluded that money transactions can only be explained as a transactions technology for which money is an input. But that runs into circular reasoning because we cannot explain why a particular asset performs this function: money is used to conduct transactions because it is money. It is possible to explain the transactions demand for money in terms of the mutual trust of...
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