Some aspects of contemporary monetary problems

Inaugural lecture--Department of Economics, Rand Afrikaans University, 27 May 1974Modern money is an advanced abstract tool that cannot be replaced by any alternative economic arrangement. The essence and form thereof bear no relationship to any specific characteristic such as the intrinsic value of the commodity of which it is made or the intrinsic value of a commodity such as gold or silver which it may represent. Reference to modern forms of money such as the Special Drawing Rights Facility as "Paper gold" merely reflects the ignorance of the user of the concept and confuses the general public. Money is essentially a dynamic phenomenon related to speculation and uncertainty and cannot be analysed satisfactorily in terms of equilibrium theory. The money concept creates even more problems when viewed within the framework of the broader finance theory. Modern money furnishes a multitude of services. The assortment of services demanded will increase with the ever greater specialisation of economic life. Each service of money will also be utilised more intensively with the passing of time. The monetary phenomena is further complicated by the ever increasing importance of substitutes for certain functions of money, especially the asset function. The evolution of more functions for money, the more intensive use of these functions, and the evolution of more forms of money add continualIy to the more complicated relationship between the real sector of the economy and the monetary sector. The exchange function, however, represents the essence of the money concept because of its relationship to the transactions volume. The Newlyn model is thus regarded as of vital importance for monetary policy. The importance of money as a neutral information carrier cannot be overemphasised. The process disturbing the neutrality of money is, however, of a stubborn cumulative nature and cannot be controlled easily once it has gained momentum. The conventional use of the monetary instrument may at times be more destabilising because of its effects on the portfolio mix and the absolute dependence of the real economic sector on a monetary coat to fit it at all times. The importance of the interest rate instrument in channeling resources between the investment function and the consumption function requires new evaluation in the light of the fact that no positive interest rate exists at present in the Western World. The behaviour of the international monetary system, mainly as a result of the monetary policy applied by the United States of America, and the transmission of the impulses thereof through the international economic system by a fixed exchange rate mechanism, must be held responsible for the rapid rate of propagation of inflation between countries. Revision of the system to cope with the ill effects resulting from the policy followed by a member, or members of the system, is an involved process and is most likely to proceed along the lines of creating a generally acceptable international money such as the Special Drawing Rights Facility which, in the words of Polak, "cannot be classified according to such familiar categories as "legal tender", "money" or "credit". The establishment of more homogeneous currency areas should result in at least identifying areas with similar economic characteristics and the adoption of policies to cope with the monetary disturbances pulsating from the different areas. It is difficult to envisage an international monetary system based on either gold or the currency of a major country, such as the dollar, for the ever integrating world of tomorrow with its rapid flux and precarious economic rhythm