Chapter Ǻ: Macroeconomics and Coordination ȀȃȂpeople had allowed for in their borrowing and lending and other plans.
Previously scheduled debt and interest payments can become disruptively
burdensome when debtors and so their creditors suffer disappointments
of kinds other than or in addition to price-level or price-trend changes.
Money is potentially a “loose joint,” as F.A. Hayek said (GarrisonȀȈȇȃ,
ȁǿǿȀ), between decisions to produce and sell things on the one hand and
decisions to buy on the other hand. In accomplishing exchanges, people
(and business firms) routinely receive payments into and make payments
fromholdingsof money, a fact whose significance Mises well understood in
developing his cash-balance approach to monetary theory (ȀȈȀȁ/ȀȈȇȀ). Ļe
sizes of cash balances desired are related to the sizes of people’s and firms’
expected inward and outward flows of payments (among other variables).
If desired amounts of money exceed or fall short of actual amounts, then
people try to adjust their holdings by modifying their behavior on the
markets for goods and services and securities. As Mises wrote,
A shortage of money means a difficulty in disposing of commodities for
money.... Under the present organization of the market, which leaves
a deep gulf between the marketability of money on the one hand and
the marketability of other economic goods on the other hand, nothing
but money enters into consideration at all as a medium of exchange.
(ȀȈȀȁ/ȀȈȇȀ, p.ȀȄȆ)Ļeories of difficulty in making contact with potential trading part-
ners help illuminate the decline of the velocity of money in recessions
(see the cited works of Clower, Leijonhufvud, and Hall, and particularly
ClowerȀȈȈǿ, p.ȇȁ). With many desired sales thwarted, people find them-
selves, more or less by default, holding more money than usual relative to
their incomes and expenditures. Ļe grim business scene, together with
uncertainty and precaution, counts against acting to get rid quickly of cash
balances that would otherwise seem excessive.
In some ways, as just implied, imbalance between money’s supply and
demand is self-aggravating. More generally, supply and demand stay in
equilibrium less readily for money than for ordinary goods and services.
Because money is the one thing routinely traded on all markets, its supply
and demand do not confront each other on a market of its own and can-
not be equilibrated with each other through a price adjustment of its own.
Equilibrating processes do operate, but only indirectly, over time, and
in a piecemeal manner through trials and errors in adjusting quantities
and prices on innumerable specific markets. When an excess demand