Study Guide to Man, Economy, and State with Power and Market

Chapter 11: Money and Its Purchasing Power 145
11. Monetary Attributes of Goods
A. Quasi Money
Some goods (such as jewels and high-grade debentures)
are very liquid and hence function as quasi money.
However, they are not actually money because they cannot
be used to settle debts at par. Nonetheless, their high
marketability raises their demand even further, and
investment in them will carry a lower rate of return.
B. Bills of Exchange
Bills of exchange are credit instruments, not money
substitutes.
12. Exchange Rates of Coexisting Money
If there are two or more commonly accepted media of
exchange, their exchange ratio will be such that no arbitrage
opportunities are available in selling the moneys against other
goods. This is termed purchasing power parity. For example, if an
ounce of gold buys 1,000 DVDs while an ounce of platinum
buys 2,500, then the equilibrium exchange rate must be 2.5
ounces of gold for 1 ounce of platinum.
13. The Fallacy of the Equation of Exchange
The holistic approach to money is epitomized in the equation
of exchange, MV=PT. This is an identity that states that the
number of money units multiplied by the average rate of
turnover (“velocity”), must equal the average price times the
number of transactions. Apart from its lack of subjective marginal
theory, there are grave flaws with this approach. The concepts
of velocity and average price are completely empty; they
are really just placeholders necessary to fill out the equation.