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)