Liquid money.
There are a lot of different ways we analyze money. The most basic theory is it lowers transaction costs for trading. Instead of me looking for a farmer who needs work in investments and trading them my work for food, I work for dollars, and then I can transfer those dollars to someone else. But money can get strange as the scale grows. It breaks the traditional microeconomic laws. Weird events can arise with metal coinage in a large economy. If the money supply stays constant deflation will occur. This has been observed as true and is consistent with Keynes macro-economic framework, which is generally accepted. Deflation is the idea that the money you hold today is worth more today. This can cause all types of problem: Lowered nominal prices of goods, increased buying power of cash, can decrease investments if hoarding cash is seen as preferable, it harms debtors whose original debt (amount owned remains fixed) so the $100.00 you owe increases in real terms, and on that same note it benefits those who receive fixed income (retirees). The problems basically reverse for inflation, which can happen when countries make huge new gold finds.
In my experience this is where the textbooks stop. But I didn’t find this to be a sufficient explanation. It does explain the effects of inflation and deflation. Instead of explaining the theory most textbooks then go into detail on the IS-LM model, which is no longer useful. My personal issue was the theory on why the market didn’t adjust on its own accord. Money and Ricardo’s theory of competitive advantages and marginal costs are often explained using a Robinson Crusoe economy.
Imagine there is a fishermen, a farmer, and a water-gatherer. They all trade together with 60 shells. One day a new guy find them and he is skilled at finding coconuts. Now instead of there being 20 shells per person, there are 15. It should be the case that before if 4 shells bought a fish, bucket of water, and coconut now 3 shells would buy that basket. The currency would adjust in relative value to the goods. But this doesn’t happen in a macro-economy. In the macro-economy the deflation would happen when, although a new guy entered and each person only has 15 shells per person, now more is being produced and the money supply is still only 60 shells. This is because the value of the currency relative to the basket wouldn’t have dropped to 3 shells thus regaining equilibrium. As a result the people in this four person economy would have a recession. Well, they obviously wouldn’t stop working, as they are working to survive. But in a grand huge economy, people do stop working, and unemployment does increase.
In a sense, money stops being rigid and in a nice equilibrium, and becomes more liquid. The Federal Reserve and macro-economists have many different tools to measure money. Such as various different money-supply measurements, known as M1, M2, M3 and so on. They also measure velocity of money, inflation, deflation, value relative to goods, value relative to foreign currencies. The measurement of money isn’t simple and discrete, it is strange. Money does not find a natural equilibrium either, that is why there is monetary policy and that is why Milton Friedman won a Nobel prize for his work in monetarism.
People do not view the money supply this way. When talking about dead, the Federal Reserve, monetary policy, fiscal spending, bail-outs and the European debt crisis, most people speak as though there is a zero-sum game being played with a fixed amount of money.
Consider Germany (I have made those two words its own sentence to give you ample considering time). Now consider their options in bailing out Greece in the short-run. They can either bail Greece out, or not bail Greece out. One is free; the other costs billions of dollars. As it turns out, not bailing out Greece will cost more money. This would not make sense in a Robinson Crusoe economy with a fixed money supply and a constant equilibrium. Typically there would be an ‘easy answer.’ Germany would not bail out Greece. Greece would now attempt to restore its currency in equilibrium with the rest of the world. They would do this by inducing inflation. This would lower the value of their currency, lower imports (why would you buy outside goods if you are In a recession?) and increase exports since their currency is now cheaper. This would help them get back to work and get their population back to work. It wouldn’t be painless, but it would work.
Instead, they are on the Euro-standard. This is different than a gold standard, but shares similarities. A gold standard has a more fixed money-supply than a Euro-standard does, after all the ECB exists. With that said, it is still a cohesive currency separating different