bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

THE MEANING OF MONEY 9
resources’ consist of his existing wealth and the amount he is able to borrow,
allowing for any existing indebtedness.
This requires us to say something briefly about the meaning of ‘wealth’.
The simplest approach is to think of wealth as the total of the real and financial
assets owned by people. Clearly, wealth is a major determinant of the
ability to borrow. However, it is not the only determinant. For example,
banks are often quite willing to lend to impoverished students - not on the
basis of their existing wealth but because they assume that the students are
likely to receive good incomes in the future and that this will enable them
to repay their debts. We can allow for this by accepting Milton Friedman’s
(1957) very broad definition of wealth, which adds ‘human wealth’ to the
total of real and financial assets (non-human wealth). Human wealth consists
of abilities and skills that enable people to borrow against likely future
income. The willingness of a financial institution to lend may arise from the
existing skills or abilities of the borrower or current enrolment on a course
of study that will probably develop the necessary skills. Thus, this broad
definition of wealth provides a better indication of the ability to borrow and
hence a measure of ‘spending resources’. Of course, even this is not complete
since banks might lend also because the borrowers’ parents are well
off or because he has a satisfactory business plan, is associated with someone
with a reasonable track record in business or much else.
Much is made in many books of the importance of ‘liquidity’— generally
defined as the ability to convert assets quickly and with little or no risk
into money. Assets are often classified in terms of degrees of liquidity, with
money itself being the perfectly liquid asset since it is, by definition, directly
exchangeable for goods and services. Thus, a house is not a liquid asset
because it is difficult to sell quickly and equities are less liquid than money
because although they can be sold quickly their prices fluctuate from day to
day and one can never be sure of the amount of money one will receive for
them when they are eventually sold. However, all assets are effectively
made liquid to the extent that one can borrow against them.
As we have suggested above, there are occasions when the possession of
‘spending resources’, while necessary, is insufficient for undertaking transactions
because the resources are not in a form acceptable in exchange (that
is, they are illiquid). However, this is usually important to individuals only
at the level of convenience, not having, for example, enough cash to buy
another beer and with the nearest bank cash machine either five miles away
or not functioning. 2 This lack of liquidity can be overcome by an inconvenient
trip to a more distant bank machine or by a loan — from the pub
owner or a friend or, perhaps with a short delay, from a financial institution.