The Contribution of Real Money Balances to the Level of Wealth

Abstract

MONETARY THEORISTS IN THE POST-KEYNESIAN PERIOD have been increasingly interested in the contributions that are made by a given real quantity of money to the level of an economy's wealth. Research on this subject has focused on the apparent contribution to wealth that arises from an excess of monetary assets over monetary liabilities in the portfolio of the private sector. The money supply has been designated as outside money and included in measures of wealth when, for example, it is currency directly issued by the government with no offsetting liability in the private sector's balance sheet. It has been designated as inside money, and omitted from many wealth aggregates, when money is the debt instrument of a private financial institution (see Johnson [7], and Patinkin [13] ). Unfortunately, phrasing the issue in this manner has resulted in neglect of the fact that any instrument that is money provides real flows of services independent of whether it is government debt or a liability of a private bank. A complete analysis must thus examine the relation between the real service flow emanating from the money stock and the real resource cost of producing this flow. When an economy opts to accept some debt instrument or commodity as money, it does so because it will be able to enjoy a larger flow of final output than would otherwise be possible; the opportunity set of the community is enlarged. For ex-