In Chapter 13 -- The General Theory of the Rate of Interest -- Keynes wrote:
It should be obvious that the rate of interest cannot be a return to saving or waiting as such. For if a man hoards his savings in cash, he earns no interest, though he saves just as much as before. On the contrary, the mere definition of the rate of interest tells us in so many words that the rate of interest is the reward for parting with liquidity for a specified period. For the rate of interest is, in itself, nothing more than the inverse proportion between a sum of money and what can be obtained for parting with control over the money in exchange for a debt1 for a stated period of time.
The footnote attached to the above is as follows:
1 Without disturbance to this definition, we can draw the line between "money" and "debts" at whatever point is most convenient for handling a particular problem. For example, we can treat as money and command over general purchasing power which the owner has not parted with for a period in excess of three months, and as debt what cannot be recovered for a longer period than this; or we can substitute for "three months" one month or three days or three hours or any other period; or we can exclude from money whatever is not legal tender on the spot. It is often convenient in practice to include in money time-deposits with banks and, occasionally, even such instruments as (e.g.) treasury bills. As a rule, I shall, as in my Treatise on Money, assume that money is co-extensive with bank deposits.
So there is a "line" that separates money from debt. But this line can move. This line is a time-measurement: three months, or three days, or three hours, or "legal tender on the spot." Or three years, or thirty years.
If we move the line out to a long time-frame (as it is presently) then we think of most debt as money. People say things like "money is debt." And the factor-cost of money is high, because most of the stuff we use for money has interest costs associated with it.
If we move the line back to a short time-frame (as it was at the end of the second World War) then we do not think of debt as money. And little of the stuff we use for money has interest costs associated with it, so the factor-cost of money is low.
A low factor-cost of money is of primary importance for economic well-being.
4 comments:
OK - this gets at "the structure of money" you mentioned.
Thanks. I was wondering what you meant.
Keynes seems to be suggesting that what point on the time scale we chose is arbitrary. Do I have that right?
So, along that scale we move from M1 -->M2 --->,--->MZM.
Right now, with nominal interest rates low, but no actual deflation, the real factor cost of money is as favorable as it will ever be. This is when government should be borrowing to (per Mike Kimel) buy "lots and lots of things" (like infrastructure) to take the pressure of the private sector.
Cheep debt could be used to reduce unemployment and help unwind expensive debt.
But Austerians rule the day, all over the world, and none of this will happen.
This is one of the greatest missed opportunities in the history of history.
Alas,
JzB
I find that things I've been talking about influence what catches my eye in a google-search, which influences what I'm writing. It coheres nicely.
"Arbitrary" perhaps. "Flexible" maybe. Certainly there is a difference between money that costs money to use, and money that doesn't. And some definitions are better than others, depending on how you need to use them. The quote strikes me a bit odd too.
VERY important, I think: The factor cost of money depends not only on the rate of interest, but also on the reliance on credit (or, the level of outstanding debt) in the economy.
For the record, I am not arguing against your proposals. I am only defining "the factor cost of money."
Maybe I can say this better, ten years after.
In the post I wrote: "the factor-cost of money is high, because most of the stuff we use for money has interest costs associated with it."
In reply, Jazzbumpa wrote: "Right now, with nominal interest rates low, but no actual deflation, the real factor cost of money is as favorable as it will ever be."
Jazzbumpa had in mind that the government should be borrowing money now (ten years ago) while interest rates are (were) low, and using it to pay for infrastructure and such.
That's not what I'm talking about.
I'm talking about all, or almost all the money in our economy, which was created the same way: by someone borrowing it and committing to repay it with interest. As long as that money continues to exist, someone continues to pay interest on it. This is why I say "most of the stuff we use for money [even cash!] has interest costs associated with it."
All the money that we think of as already existing has this "commitment" to repay with interest. That cost -- or to simplify matters, the cost of interest alone -- is what I called the "factor cost" of money. Every dollar we have, if it is not one we recently borrowed ourselves, was borrowed by someone at some point in time. And that person is still paying interest on that dollar.
Now you might think it costs you nothing if the other guy has to pay interest. And in the small-minded, microeconomic sense you would be correct. But in the big picture, in the macro economy, the other guy paying interest means there is less aggregate demand. In other words, a high factor-cost of money makes the economy slow.
And of course, in the macro economy the act of repayment takes money from the productive sector and puts it into the financial sector, where it can be loaned out yet again at interest.
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