A non-monetary or barter economy is a figment of economist’s minds — a phantasm which is incapable of practical working in a interdependent, production-oriented world. In such a mythical non-monetary economy, household decisions to save for future consumption, if they are executed, must automatically increase the stock of capital. In a monetary economy, on the other hand, this is no longer true, for households may, for example, decide to use current income to increase their wealth-holdings in the form of money or other financial assets thereby forcing other economic units such as business firms, or governments to provide these either by drawing down either their cash balances or net placement holdings, or by inducing the banks to increase the supply of money; the increased wealth-holdings by households does not automatically augment society’s wealth. It is the introduction of money, financial assets which are traded on an organised spot market, and a clearing system for private bank debt (based on fractional reserves) into the economic system which permits the separation of the investment decision from (1) the savings decisions and (2) portfolio choices for individuals, although for a closed economy as a whole no such independence of savings, investment, and portfolio choice exists.
KeywordsMoney Supply Capital Good Monetary Authority Spot Market Monetary Economy
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