1. HET has two overlapping purposes - to illuminate contemporary economics and 'keep alive' our past. The last word on energy was not uttered during the age of steam; and the last word on money was not uttered before the development of modern banking.  

James needs something more than a 10-year old niece to rescue an 18th century theory. A cashless society is at the other end of the spectrum to an all-cash society - a theory must be able to encompass more than one time-specific episode. 

Money as a medium of *exchange* must enter into the equation of *exchange*. Money cannot be defined as the number of nieces x the number of birthdays x $10.

If we assumed that there was no cash, just deposits - a perfectly legitimate theoretical operation - James' equation of exchange would reduce to

US$0 = US$15trillion

2. James: 'BTW, the Fed does NOT control the Fed Funds Rate.  Check the data, and you'll find that it varies on a daily or weekly basis.  The Fed claims to be targeting it between 0% and .25%.  It varied between 0.39% in November 2008 and  0.07% in July 2011, rising to 0.16% and falling back to that level in February 2014.  The word "control" should mean keeping the value at a rate the Fed chooses. The Fed influences the rate by its participation in the Federal Funds market: purchases or sales of securities.'

Checking the data: In November 2008 (30 October 2008 to 16 December 2008), the target Federal Funds rate was not - as James asserts between 0% and .25% - but 1.0%. 

https://apps.newyorkfed.org/markets/autorates/fed-funds-search-result-page

A question for Tom Humphries (or others with operational knowledge): has James misunderstood what the target Federal funds rate is? My understanding is that it is an *overnight* target inter-bank rate (with "inter-day highs" and "lows").   

3. Can anyone explain why the money demand/money supply model or the loanable funds model is still taught? 

4. James: 'The first question was, why doesn't Robert recognize the self-contradiction in noting a four-fold increase in the quantity of currency in circulation and yet protesting that the Fed "prints money"?'  

There has been a four-fold increase - not in the quantity of currency in circulation - but in the monetary base.

The Fed have not been abnormally "printing money".  

James: 'Must not the Fed print money for its quantity to increase?'

No.  

James: 'The second question was, why is it meaningless to notice the rise or fall of a ratio?'

As M0/M2 falls - because of technology (bank deposits for wages, etc) - it become - for economists - increasingly devoid of value. How many times did James' niece's $10 circulate to create $15trillion of national income (when she probably has it in her piggy bank)? 

We have enough nonsense in economics without adding a tooth fairy theory of money.  

________________________________________
From: Societies for the History of Economics <[log in to unmask]> on behalf of James Ahiakpor <[log in to unmask]>
Sent: Wednesday, September 16, 2015 1:35 PM
To: [log in to unmask]
Subject: Re: [SHOE] Fwd: origins of Y=C+I+G+(X-M)

A great deal of debate or disputes in economics tend to arise from
different meanings assigned to terms.  Robert Leeson's questions relate
to the meaning of "money."  I have pointed out the confusion that the
modern definition of money as anything that is used as a medium of
exchange, which is different from the classical definition of money as
the particular commodity that serves as the unit of account, and cited
references.  He ignores these.  I will try for the last time to indicate
the relevance of the classical definition of money as the unit of account.

Robert Leeson wrote:
> Since I am re-familiarizing myself with material that I haven't encountered for years: can we agree terms?
>
> M0 = C (currency in circulation)
> H = MB = C + R
> M = C + D
>
> "M0 (I prefer H, high-powered money)"??
M = C + D = C + R + BC; BC = bank credit.  Thus, M = H + BC.  Bank
Credit is a function of the public's currency-deposit ratio and banks'
reserve-deposit ratio (over and above a central bank's required
reserve-deposit ratio).  Because of this, a central bank does not
control BC; it may influence it by variations in its required
reserve-deposit ratio.  What a central bank controls is the volume of H,
the unit of account.  It cannot control M, whether M1, M2, etc.  Robert
may want to download Robert Greenfield and Leland Yeager's 1986 _SEJ_
article, "Money and Credit Confused: An Appraisal of Economic Doctrine
and Federal Reserve Procedure" for some implications of mixing credit
with money in our modern discourse.

The relevance of the classical Quantity Theory of Money that Robert
appears to be questioning deals with HV = Y = Py = 1/k(H).   Thus, the
proportion of their income (k) that the public desires to keep as cash
does affect the price level or the valuation of produced goods and
services.  The higher the proportion, the lower the value of y (Y), and
vice versa.
>
> "Thus, if a central bank keeps the quantity of money (H) unchanged and yet prices rise, we can expect that this would have been brought about by either a decrease in output or a decrease in the demand for money to hold, or a combination of the two events"??
>
> 1. C has increased from just under $400 billion (1994) to $1.38trillion (August 2015); while M2 has increased from $3.4 to $12.1 trillion.
M2 is not under the control of a central bank.  It is mostly the savings
of the public.
>
> How much of C circulates abroad (and thus has no significant influence on US Y?)
What does knowing the exact amount matter?  If more goes abroad,
domestic prices would be lower than if less goes abroad.
>
> 2. Money retains it's role as a unit of account in a cashless society - deposits (which continue to be denominated as in the same units as before) become the sole medium of exchange.
>
> It would therefore *not* be 'hard to estimate their total value into something called "national income".' M = D: therefore D.V = Y.
>
> Since C = 0, why examine its relationship to Y?
I have disputed the claim or meaningfulness of a "cashless society."  In
spite of the great innovations in the payment system since 1994,  to use
Robert's dating of the four-fold increase in currency in circulation,
some people still hold on to the idea of a "cashless society."
Shouldn't the amount of cash in circulation decrease if we were heading
in the direction of 0/Y?
>
> 3. It seems unusual to call 'money' that which is not money (R or H) - and will not become 'money' unless Goldman Sachs et al. chose to stop severing the flow of 'monetary' policy.
This is Robert's own problem.  Use the classical definition, and only H
is money.
> 4. Monetary policy should be called 'interest rate policy'.  The Fed controls the Federal funds rate (while 'the cartel' manipulates libor) - but they do not control the money supply.
Monetary policy, properly, should be variations in H (aimed at keeping
the price level constant, replicating what a commodity-money system as
in the classical period would have produced via the price specie-flow
mechanism), not interest rate targeting.  BTW, the Fed does NOT control
the Fed Funds Rate.  Check the data, and you'll find that it varies on a
daily or weekly basis.  The Fed claims to be targeting it between 0% and
.25%.  It varied between 0.39% in November 2008 and  0.07% in July 2011,
rising to 0.16% and falling back to that level in February 2014.  The
word "control" should mean keeping the value at a rate the Fed chooses.
The Fed influences the rate by its participation in the Federal Funds
market: purchases or sales of securities.
> Indeed, monetary targeting was abandoned in the mid-1980s because of the inability of central banks to hit their targets.
>
> 5. "Central banks profit from creating money". Central Banks profit by receiving interest from their assets (typically, Treasury securities) and from not paying interest on C (one of their liabilities) and - typically - not paying interest on the other component of their liabilities (R). They would continue to make a profit if C disappeared.
C will not disappear!  There is always some convenience for holding
cash.  Think about the difficulty of wanting to give your 10-year old
niece $10.  Swiping your credit card?  And what happens when the
electricity goes out?
> 6. Is it helpful to policy-makers to think in terms of an equation involving variables over which they have very little control?
My point, exactly!  Policymakers should ignore Milton Friedman's
insistence on M1 or M2 as the relevant variable a central bank should
want to control.  The variable they should be concerned about is H, the
classical money.  Incidentally, when Friedman finally got tired of
urging central bankers to control the growth of M1 or M2, it was to H
that he resorted in 1984, calling for its growth rate to be zero:
freezing the monetary base.  Similarly, in his Free to Choose video
illustrating the cure for inflation, it was the stop button to the money
printing machine in Washington, DC, that he hit.
>
>
> (I am not sure what questions James wishes me to answer).
Next time, please read my statements carefully.  The first question was,
why doesn't Robert recognize the self-contradiction in noting a
four-fold increase in the quantity of currency in circulation and yet
protesting that the Fed "prints money"?  Must not the Fed print money
for its quantity to increase?  The second question was, why is it
meaningless to notice the rise or fall of a ratio?  It is much too
wasteful of time to be talking past each other.  I shall from now on
ignore any more questions that derive from not paying paying attention
to what I've earlier said.  I believe some readers on the list get
tired, even annoyed, reading repetitions of the same points.

James Ahiakpor
> ________________________________________
> From: Societies for the History of Economics <[log in to unmask]> on behalf of James Ahiakpor <[log in to unmask]>
> Sent: Tuesday, September 15, 2015 11:30 AM
> To: [log in to unmask]
> Subject: Re: [SHOE] Fwd: origins of Y=C+I+G+(X-M)
>
> Robert Leeson wrote:
>> Could James explain the purpose of examining the relationship between M0 and Y?
> I think Tom Humphrey earlier gave a cogent explanation to Robert's
> initial query.  Perhaps, it's my turn to elaborate.  Note that Y = Py,
> and M0 (I prefer H, high-powered money) multiplied by its velocity (V)
> equals Y (HV = Y = Py).  From that relation, we also can understand the
> behavior of P (the price level), since P = HV/y. Furthermore, money's
> velocity is the inverse of its demand to hold (k = 1/V) in the Cambridge
> version of the Quantity Theory.  So that P = H/ky.  Thus, if a central
> bank keeps the quantity of money (H) unchanged and yet prices rise, we
> can expect that this would have been brought about by either a decrease
> in output or a decrease in the demand for money to hold, or a
> combination of the two events. BTW, both versions of the Quantity Theory
> can be read in David Hume's 1752 essay, "Of Money."  Fisher (1913, 25-6,
> n. 2) attributes the explanation with the exchange equation to David
> Ricardo ["Ricardo probably deserves chief credit for launching the
> theory"], but Ricardo took it from Hume.
>> In a truly 'cashless society': what information would be revealed by examining the relationship between zero and national income?
> As Adam Smith (_WN_, 1: 36) explains, money is the particular commodity
> in a society that is used to measure the exchange value of all other
> commodities.  In a "truly 'cashless society',"  goods and services would
> be produced and exchanged but it would be hard to estimate their total
> value into something called "national income." There would also be N(N -
> 1) relative exchange values or relative prices.  This is why J.S. Mill
> (3: 502) explains that the "first and most obvious" among the "principal
> inconveniences" alleviated by money's use in society is to serve as a
> unit of account or measure of value.  He adds: "This advantage of having
> a common language in which values may be expressed, is, even by itself,
> so important, that some such mode of expressing and computing them would
> probably be used even if a pound or a shilling did not  express any real
> thing, but a mere unit of account" [also quoted on pp. 38-9 of my
> _Classical Macroeconomics_.]
>
> This is also why the expectation of our arrival at a "cashless society"
> is a merely pipe dream to me.  Central banks profit from creating money;
> many people demand money to use in some transactions; and there are
> limits to the convenience of using electronic means of payment.
>
> I hope Robert will answer my previous questions to him before he poses
> another.
>
> James Ahiakpor
>> ________________________________________
>> From: Societies for the History of Economics <[log in to unmask]> on behalf of James Ahiakpor <[log in to unmask]>
>> Sent: Tuesday, September 15, 2015 7:01 AM
>> To: [log in to unmask]
>> Subject: Re: [SHOE] Fwd: origins of Y=C+I+G+(X-M)
>>
>> Robert Leeson wrote:
>>> Is James suggesting that money *should* be defined only as a unit of account and *not* as circulating media (medium of exchange)?
>> Yes, indeed.
>>> Is there any literature on the historical values of the M0/M2 ratio?
>> Yes, it exists.  One easily can calculate the series from Federal
>> Reserve statistics, too.
>>> My guess is that it has fallen enormously.
>> It is because the data exist that one can say that the ratio "has fallen
>> enormously."
>>> If M = M0; and
>>>
>>> M0.V = P.Y
>>>
>>> or V = P.Y/M0
>>>
>>> wouldn't V become meaningless as M0/M2 fell?
>> Having fallen does not make the ratio meaningless.  I wonder why Robert
>> thinks it does.  In fact, the classical explanation of the Quantity
>> Theory is in respect to money, the unit of account.
>>
>> BTW, I should have inserted "mainly" before "by the private sector" in
>> my post yesterday.  There are government checkable deposits with
>> commercial banks, too.
>>
>> James Ahiakpor
>>> ________________________________________
>>> From: Societies for the History of Economics <[log in to unmask]> on behalf of James Ahiakpor <[log in to unmask]>
>>> Sent: Monday, September 14, 2015 5:17 PM
>>> To: [log in to unmask]
>>> Subject: Re: [SHOE] Fwd: origins of Y=C+I+G+(X-M)
>>>
>>> Robert Leeson correctly states that "the US monetary base increased over
>>> fourfold ($0.847626 to $3.3919 trillion)" and yet declares: "It is
>>> fallacious to suggest that 'the Fed has been printing money'."  I see a
>>> self-contradiction in Robert's protest.  I wonder why he doesn't.
>>>
>>> The only thing a central bank can *print* is its own currency.  Bank
>>> deposits are originated by the private sector: deposits made by
>>> individuals (households and firms).  Perhaps, it's Milton Friedman's
>>> insistence on focusing the profession's attention on M2 as the relevant
>>> measure of "money" that has created the problem for Robert.  This, in
>>> spite of the classics' definition of money as the unit of account, hence
>>> currency only.  I might note that Irving Fisher (1912) follows this
>>> classical principle when he writes: "although a bank deposit
>>> transferable by check is included in circulating media, it is not
>>> money.  A bank /note/, on the other hand, is both circulating medium and
>>> money" (p. 148; italics original) [quoted on p. 46 of my /Classical
>>> Macroeconomics/, 2003].
>>>
>>> Of course, I agree with Tom Humphrey's earlier clarification to Robert
>>> on the link between the monetary base and M, through the so-called money
>>> supply multiplier.
>>>
>>> James Ahiakpor
>>>
>>> Robert Leeson wrote:
>>>> "The equation of exchange cannot ... explain why MV changes".
>>>>
>>>> Does it - anywhere - address the connection between M (currency +
>>>> deposits) and the monetary base (currency + reserves)?
>>>>
>>>> Central banks can increase reserves - but just have to hope that these
>>>> newly-created reserves are translated into loans (deposits) and thus
>>>> stimulate the aggregate economy. The Fed's "primary dealers" are the
>>>> chosen channel: Lehman Brothers, Bear, Stearns, Merrill Lynch, MF
>>>> Global, Goldman Sachs etc.
>>>>
>>>>    From just before the start of the monetary policy response to the GFC
>>>> to today (August 2008-August 2015), the US monetary base increased
>>>> over fourfold ($0.847626 to $3.3919 trillion), while the US money
>>>> supply (M2) increased by only about 56% ($7.7 to $12.1 trillion).
>>>>
>>>> Over roughly the same period (August 2008-July 2015), the US CPI has
>>>> increased by less than 10% (218 to 238; 100 = 1982-1984).
>>>>
>>>> It is fallacious to suggest that "the Fed has been printing money" -
>>>> the expansion of reserves has not unduly fed into M (and therefore P
>>>> and/or Y. )
>>>>
>>>>
> --
> James C.W. Ahiakpor, Ph.D.
> Professor
> Department of Economics
> California State University, East Bay
> Hayward, CA 94542
> 510-885-3137
> 510-885-7175 (Fax; Not Private)


--
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542
510-885-3137
510-885-7175 (Fax; Not Private)