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 The Value Of Money by Pigou

This journal was born based on the debate that occurred in the field of economics, especially related to the theory of the value of money. Pigou emphasized that the often debated “Quantity Theory” was actually only a tool to facilitate understanding of the ultimate causes of the value of money. According to him, just like other tools in economics, be it language, diagrams, or algebra, they all have the same goal, namely to organize ideas in an orderly manner. While there is some debate about the relative convenience and usefulness of the various tools, he says that this should not be misconstrued as a fundamental disagreement about the true causes of the value of money. Pigou emphasized that although the proposed approach is different from that developed by Professor Irving Fisher, he neither opposed nor criticized Fisher's analysis of the purchasing power of money. 

In the second part, Pigou discusses the use of the term "value" in the context of the value of money. According to him, the word "value" which is usually used by economists refers to changing values, Pigou also does not see the need to create a new term in this case. On the other hand, Pigou stated that there was a need for a clearer definition regarding the "exchange value of a unit of money", pointing out that exchange value is related to commodities. In this case, Pigou refers to the approach used by Marshall in Pure Foreign Trade Theory, which assumes that the value of all commodities other than money is determined independently of the value of money. So based on this assumption, the value of each commodity combination can be measured in units of a single commodity, such as bushels of wheat. Furthermore, it is explained that the value of money is regulated by general conditions of demand and supply, so it is concluded that analysis of the value of money requires the same analysis as analysis of the forces of demand and supply for other commodities. 

The next discussion is about human needs for legal means of payment in everyday life. Human beings continually have obligations to pay and have claims due against them. However, these payments and claims are rarely timely and must be fulfilled using legal means of payment. It further explains that legal tender includes banknotes, bank balances that can be used to draw checks, and coin tokens for practical purposes. This section also explains that individuals tend to keep most of their wealth in the form of property rights to legal tender, such as wheat, to provide convenience and security in carrying out daily transactions and to protect themselves from sudden needs or price increases. Then Pigou also explained the concept of a demand schedule for property rights to legal tender money, which is based on the proportion of total resources selected to be held in the form of property rights to legal tender, the number of units of legal tender, and the value per unit of those rights in wheat units. This is written in a mathematical equation, namely, P=MR, where P is the price per unit of property rights, M is the number of units of legal tender, and R is the total resource in units of grain. 

The next section discusses the derivation of the demand schedule for legal tender from the demand schedule for ownership rights to that payment instrument. In this section it is stated that people store ownership rights to legal payment instruments in two forms, namely: in the form of cash and in the form of bank balances. If bankers kept their entire bank balances in legal tender in their vaults, then the derivative demand schedule for legal tender would be the same as the direct demand schedule for ownership rights to that payment instrument. However, in reality bankers only keep a small portion of the balance in the form of cash, while most of it is kept in the form of bank balances. Pigou also stated that the request derivatives for legal tender depend on the choices made by people, namely, the proportion of resources they choose to hold in the form of legal tender. The mathematical equation of this derivative is: 

P = (k R)/M { c + h (1 – c)}, or M = (k R)/P { C + h ( 1 – c)} 

This section provides further explanation regarding the variables in the given formula. The first variable is the R variable, which represents society's total real resources in the form of commodities, for example wheat. According to the formula, the greater the value of this variable, the higher the demand for money. Where an increase in R tends to occur due to technological advances or companies increasing production efficiency. On the other hand, it is argued that discoveries that facilitate the production of commodities with a demand elasticity of less than unity can reduce the total amount of “value grain” that exists. This is because an increase in the quantity of these commodities causes a decrease in the overall value of grain, so that the amount of "grain value" that needs to be stored in the form of property rights in legal tender decreases. 

Next is the variable k, which represents the proportion of community resources chosen to be saved in the form of ownership rights to legal tender. This decision is influenced by factors such as the convenience and risks involved in having such rights, as well as the satisfaction gained from using the resource directly. There are three main uses for resources, namely: production for comfort and security, commodity production, and direct consumption. The presence of direct consumption influences, but does not completely overcome the impact of the main factors influencing resource use choices. This section explains that there is a crucial question for individuals, entrepreneurs and the general public, which is more profitable, having more cash or more commodities in their inventory. Because the satisfaction obtained from using resources for future production tends to decrease as the number of units allocated increases. This is equivalent to the satisfaction obtained from units of resources held in the form of cash. Money is important because it is used as a means to facilitate exchange, especially in situations where exchange without money is almost impossible. Therefore, money is expected to be a means of providing security, because it has the ability to be exchanged for commodities. 

After variable k, this section moves on to explain variable c which describes the proportion of ownership rights to means of payment that people choose to keep in the form of actual legal means of payment, such as cash in each individual's pocket or cash. This section explains that habit and convenience are the main factors in determining the choice between using actual cash and bank balance. For example, the use of checks as a substitute for cash is growing rapidly in some countries, which will leading to increased use of checks relative to cash. Next is the identification of several factors that influence the proportion of actual cash use and bank balance. The more people have bank accounts, the more likely they will hold ownership rights to payment instruments in the form of bank balances. Likewise with the ease of receiving checks. The easier it is to accept checks in everyday transactions, the more likely people will use checks instead of cash. Additionally, merchants who let their accounts run longer before requesting payment tend to use checks rather than cash for payments of large amounts. Apart from the things already mentioned, accounts, the proportion of rich people in the community, the habit of paying through accounts, and the ease of paying directly from bank balances are among the factors that influence the proportion of actual cash use and bank balances. The final paragraph of this section explains that bank sustainability can also influence the choice between using cash or bank balances. Where the risk of loss when holding money in a bank balance becomes relevant when the sustainability of the bank is questioned, which ultimately leads to a situation where people prefer to use cash to avoid these risks. 

Next, the variable h is the proportion of actual cash that the banking system chooses to hold as a reserve against its obligations to customers. The influence that determines this proportion is similar to the variable k, namely the proportion of resources that people generally choose to keep in the form of ownership rights to cash. The benefits of these cash reserves depend on several key considerations, including the internal organization of the banking system to preserve large reserves, the type of bank liability claims, the proportion of bank liabilities in the form of bank notes or bank balances, as well as the public's temperament in dealing with panic and the level of trust in the banking system. This suggests that a new bank in an impulsive society will require proportionally larger reserves than a proven bank in an unemotional society. In the next section, the relationship between the proposed demand formula and the "exchange equation" in quantity theory is explained. Even though at first they seem contradictory, these two things are actually consistent. When people decide to store more resources in the form of money, the speed of circulation of money will decrease proportionally. 

The next section in this journal explains the importance of considering the money supply equation to determine the value of an item, in addition to the demand equation. There are several alternatives in determining the money supply that a country can choose, including setting a fixed amount of legal money by the government, determining a certain portion of the legal amount of money, or even using freely printed money at the central bank. Each alternative has a different impact on the elasticity of the money supply and the value of the currency. This provides an overview of how the value of money is determined by government decisions, manufacturing regulations, and the nature of a country's monetary system. 

Next, Pigou explains the complex relationship between money demand and supply in the context of money. In this section we discuss how the value of money is determined by the intersection of the demand curve and the supply curve. Complexities arise when factors that influence both the demand and supply of money interact simultaneously. Pigou explains how certain innovations or developments can affect both the demand and supply of money, resulting in complex effects on the overall value of money. He also emphasized the challenges in analyzing the value of money compared to other commodities because of the dual influence of factors on the demand for and supply of money. So it is necessary to consider the interactions between various economic forces that influence the demand and supply of money, which will achieve a comprehensive understanding of the dynamics that shape the value of money in an economy.

Referensi: 

Pigou, A. C. (1917). The value of money. The Quarterly Journal of Economics, 32(1), 38-65.