Monetary Economics: A Review Essay
Herschel I. Grossman
NBER Working Paper No. 3686 (Also Reprint No. r1698)
Issued in April 1991
NBER Program(s):Monetary Economics, Economic Fluctuations and Growth
In this essay I define money to be whatever objects serve as generally acceptable media of exchange and I define monetary economics to be the study of the causes and economic consequences of the monetization of exchange -- that is, of the use of media of exchange. These definitions lead me to specify the distinctive objectives of monetary economics to be to understand (1) the monetization of exchange and its relation to the technologies of production and of exchange, (2) the form that money takes and, especially, the viability of fiat money, (3) the determination and significance of the real value of units of money, and (4) the relation between the nominal quantity of money and aggregate economic activity. The essay tries to acquaint the reader with the contents of the recently published "Handbook of Monetary Economic" as they relate to these objectives of monetary economics and offer some critical thoughts on selected unsettled issues in monetary economics that my reading of the "Handbook" suggested.
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Document Object Identifier (DOI): 10.3386/w3686
Published: Journal of Monetary Economics, Vol. 28, No. 2, pp. 323-345, (October 1991). citation courtesy of
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This is the second installment in Walter Mosley’s cycle of essays on Cultural Famine. The introduction and first installment were published in the October 23 issue. –The EditorsAd Policy
“The rich get richer…” This truism is irrefutable. “…and the poor get poorer.” We look away from ourselves, and our loved ones, when the latter phrase is used to complete the saying.
Often only the first part of this age-old axiom is quoted. It’s as if we are silently saying, “There’s no reason to talk about the poor, about poverty. Let’s just accept the notion that money migrates toward money and leave it at that.”
But where does this money, which moves so unerringly into rich folks’ pockets, come from? This is one of the most important questions in everyday working people’s lives. Because the money that makes the rich richer comes out of the sweat, the sacrifice and ultimately the blood of working men and women.
Many people deny that they are the victims in the proverb because even though the rich make money off them, too, they are also making money, being middle class, off the working and lower classes.
It’s an imagined pyramid scheme, and like all its brethren, a scam.
So-called middle-class people look at working people and say to themselves, “I’m not doing so bad. Look at that poor slob. He’s the one getting poorer. I’m traveling along in the wake of the rich. I don’t have a mansion, but I own a mortgage on a house.”
This is what the poor Irish and Italians and Jews told themselves about black people in late nineteenth- and early twentieth-century New York.
Today people say it about the Mexican and Central and South American migrant laborers who toil in our fields and factories. “They are the ones who live in squalor and poverty.”
What is the difference between the working class and the middle class? Is it a clearly demarcated line dividing those who pass on wealth and those who accrue it?
Most people I know consider themselves middle-class workers. They’re making good money, they say, and have good credit at the bank. Their children will go to good colleges and get better jobs. They will retire in comfort and travel to Europe (or Africa) to see the genesis of their culture.
These self-proclaimed middle-class citizens feel a certain private smugness about their proven ability to make it in this world while those in the working and lower classes–because of upbringing, lack of intelligence or will, or bad luck–are merely the fuel for the wealth of the nation.
But how do you know where you fit in the class system? Is it a level of income? Is it defined by education or the kind of job you possess? Is class a function of your relationship to your labor? For instance, are you in the middle class because you own your own business? Or are we defined by our rung on the ladder? As long as we are not at the bottom (or the top), then we can say we are in the middle.
It’s a difficult question because the economic state of everyone’s life in this world is in perpetual flux. Depression, inflation, recession–all these and many other economic events continually change our finances and redefine our position in society. Our money grows in the bank, but at the same time it loses value. Our property increases in value, but taxes and expenses also rise. We say that we own the mortgage on our home, but more often than not the mortgage controls us. To buy a $10,000 home we pay $40,000 over thirty years. Where did that extra $30,000 go?
It seems to me that we need a rule-of-thumb definition of class. We can’t use the pristine forms of geometry to prove where we are and what we’re worth. Mathematical sums don’t define wealth; the ability to control your time and quality of life does.
I’d like to put forward a system of class definition that is grounded in what I believe to be a common-sense approach to the issue.
Poverty is defined, in my system, by people not being able to cover the basic necessities in their lives. Indispensable medical care, nutrition, a place to live; all these essentials, for poor people, are often and chronically beyond reach. If a poor person needs $10 a day to make ends meet, often he or she only makes eight and a half.
Wealth, in my definition, is when money is no longer an issue or a question. Wealthy people don’t know how much money they have or how much they make. Their worth is gauged in property, natural resources and power, in doors they can go through and the way that law works. Wealth moves like a shark over the rockbound crustaceans of the poor and working classes.
The middle classes, which logic would tell us occupy the space between poverty and wealth, are made up of two very different subspecies. One is the working class; the other is the class of limited privilege.
It is my proposition that the great majority of us fall into the former group. The privileged middle class are people who have to work for a living but who can buy almost anything they desire: a summer cottage, a prestige car, berths at the finer schools for their children. These people are lawyers, real estate developers, the owners of small and successful businesses. If someone in the class of privilege were to lose their job or experience reversals in their business, they would have time (between nine and twelve months) to consider their options before any part of their lifestyle would necessitate change. Their children could stay in private schools, they could still go to fine restaurants and the opera on Friday nights, and even donate to the same charities.
But if a person from the working class loses her job, she would have to find an equivalent one within the month or it’ll be fast food and junior college for everyone in the family.
Working-class people are (excuse the Marxism) wage-slaves. Those in the working class live on the edge of poverty, saying to themselves that they are doing all right. They drink and watch far too much TV. They buy Lotto tickets and live moderate lives that are far beyond their means. The profit they generate flows to the rich, and they borrow to fill out the coffers.
Most Americans are working-class wage-slaves, arguing that they’re better off. This fantasy, more than any other confusion, hobbles us. Because we fear to see how delicate our economic state is, we cannot motivate ourselves to demand change.
Capitalism, the accrual of wealth from labor, is the religion of America; poverty our cardinal sin. To recognize our position in relation to wealth would be perceived as a confession of wrongdoing, and so we stoically bear up, pretending we are doing all right. And because we don’t see ourselves clearly, we have poor healthcare, no adequate insurance for old age, poisons in our water and our food and the continual nagging fear that things may at any moment fall apart.
Where is the money? It’s not in our bank accounts or serving our people. It’s not in affordable housing, quality education or the development of sciences that would better the species and the planet. It’s not being used for the purpose of global peace.
America is the wealthiest nation in the world, by far, but we the American people are not wealthy. We, most of us, live on the border of poverty. In the distance are towering silvery skyscrapers housing our corporations and our billionaires. But do not be fooled. This skyline does not belong to us. We are not partners in the corporation of America.
The money we make, the wealth we have created, is paradoxically beyond our reach. We live in a separate America. An America that is heated by oil that we may or may not be able to afford; an America that makes profit off of cigarettes, alcohol and imperialist incursions into underprivileged nations; an America that cares more for corporations than it does for its living, breathing citizens.
Where is the money? It has been turned into gold and laid upon our willing backs. We struggle under the weight of the wealth of America, and there we are ground down until, in the end, it shall be soaked in our blood.
This knowledge, as depressing and oppressing as it is, is also a harbinger of hope. Poverty is not our fault or our destiny. We, the poor and working class, have built this nation and it, along with all its fabulous wealth, belongs to us. From the Atlantic to the Pacific we, the workers, are the ones who hold sway. And every vault, every clinic, every drop of sweat fallen upon American soil is our democratic birthright.
The rich don’t own anything that we haven’t built. The government means nothing that we don’t endorse. These are the secrets that need to be made public. There may be charities to help with income and profession, there may be those who lend a helping hand. But the helpers and the help are equals in this country, in this nation. There are no hierarchies of class in a democracy. There is only freedom and debt owed to the millions upon millions who have labored to make us great.
The greatest service that could be given to the poor and working classes is the knowledge that they, that we, all deserve the best that America has to offer, and if there are those who try to diminish us because of our bankbooks or our education this is a crime against our Constitution. We carry this nation on our backs, and everything it has done is our property and our responsibility.
A man can be rich, but only a nation can be wealthy. And if any person of any age suffers from poverty, then our whole country bears the shame.