bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

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THE MEANING OF MONEY 1
The Meaning of Money
‘It is not any scarcity of gold and silver, but the difficulty which such
people find in borrowing, and which their creditors find in getting
payment, that occasions the general complaint of scarcity of money.’
Adam Smith, Wealth of Nations (1776) IV. I
What you will learn in this chapter:
• The nature of monetary economics
• The meaning of 'money' in economics
• The importance of money in exchange
• The changing nature of money and its link with social change
• The relationship between money and credit
• The importance of credit
• The meaning of the 'transmission mechanism' of monetary policy
1.1 Introduction
Monetary economics is a branch of economics centred on money and monetary
relationships in the economy. It concentrates on the links between
money and prices, output, and employment and so is a development of
macroeconomics. Monetary economists have been particularly concerned
with the relationship between the rate of growth of the money supply and
the rate of inflation, although monetary economics is a much wider area of
study than this implies.
Monetary relationships have been studied for several centuries and so
the subject contains a great deal of theory. However, we should always
recall that the goal of monetary economics lies in a better understanding of
monetary policy: what, if anything, governments and/or central banks can
do to improve the way in which economies perform through the use of the
instruments of monetary policy or, at least, to avoid damaging the performance
of the real economy.
Plainly, monetary policy is now regarded as central to the welfare of
households and the profitability of firms. The regular decisions of central
banks on interest rates are major news items. Changes in exchange rates are
part of every day journalism. The question of whether the UK should give
up its present currency to join a monetary union is one of the principal political
decisions of our day. Monetary policy has become so sensitive that over
the past dozen years many countries have made major constitutional decisions
regarding the operation of monetary policy.