Money Supply, Throughput and Inflation

Material living standards are a function of three main variables – net throughput (Tn), population, and the prevailing distribution (D) of Tn among different social and occupational groups.

Tn is a function of available wealth, the state of technology, wealth renewal rates, human values, D and the proportionate flow of money through different economic channels.

The value of money is determined by Tn and money supply. Increases in money supply greater than increases in Tn lead to devaluation of money. This and only this is true inflation.

Money is an agent of throughput in that its existence facilitates the exchange and consumption of goods and services which is Tn. However, as long as there is plenty, the actual quantity of money is irrelevant as a determinant of throughput. What is relevant is (related to D) the relative proportion of the total money supply flowing through different channels of the economic system – government, investment, wages and salaries. Consumer spending, welfare transfer payments, and savings.

Changes in money supply affect throughput but not because the overall quantity is changed, rather because the means of changing the quantity has always involved changing the relative proportions flowing through different economic channels.

An increase in the money supply isn’t necessarily inflationary. That depends on its effect on throughput, since inflation only takes place if the money supply rises faster than throughput, or if throughput falls faster than the money supply. A fall in the money supply could be inflationary if that fall took place in such a way as to cause a greater fall in the throughput rate.

The statement that actual money supply is irrelevant as a determinant of throughput may appear to contradict the definition of true inflation, since the true inflation rate is one determinant of throughput, as will be discussed later.

There is no contradiction because the true inflation rate is determined by the relation between the rates of change of money supply and Tn. The rate of change, the first derivative of the quantity, is relevant; the actual quantity itself is not.

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