Chapter Ǻ: Macroeconomics and Coordination ȀȃȆagain no oversaving occurs. If savers are buying already existing physical
assets or securities, the question shifts to what their sellers are trying to
do with the proceeds. If those asset sellers are using the proceeds for con-
sumption or new capital construction, again no oversaving occurs. If they
are trying to shift wealth into other vehicles of saving, the question reap-
pears of what these other vehicles might be: what is the thing or things
whose excess demand matches the deficiency of demand for currently pro-
duced goods and services?
How, furthermore, could the excess demand for this something per-
sist? Consider how an excess demand might work itself out.(Ș)Ļe thing’s
quantity might increase, as with automobiles and certain claims on finan-
cial-intermediary institutions.(ș)Its price might rise or its yield fall, as
with Old Masters, securities, and claims on financial intermediaries.(Ț)If
its quantity and price are both rigid, frustrated demand for the thing
might divert itself onto other things, with macroeconomic consequences
much the same as if the diverted demand had run in favor of the substi-
tute goods in the first place.(ț)For only one thing does none of these
responses to excess demand operate, requiring some quite different pro-
cess. Ļat thing is money, the medium of exchange. (Even nearmoneys
can respond in quantity or price or yield.)
In the current U.S. monetary system, the quantity of money depends
on the policy-determined stock of government base money and the cir-
cumstances represented in the textbook money-multiplier formula. Of the
four supply-and-demand-equilibrating mechanisms, the first, the quan-
tity response, is not free to work “automatically” (not apart from mone-
tary policy, for existing institutions do not allow the actual quantity fully
to accommodate itself to changes in the demand for money at the exist-
ing price level). Mechanismȁ, the price response, does not work because
money lacks a price of its own. MechanismȂ, diversion of demand, does
not work because money supply and demand do not exhibit their imbal-
ance on a specific market from which excess demand might be diverted.
(Besides, what would diversion mean for the medium of exchange itself ?)
Because money is the medium of exchange, excess demand for it is not
clearly apparent. Everyone can obtain as much money as he thinks he can
“afford” to hold under his circumstances by restraining his purchases, if
not by eagerness in selling whatever he has for sale. (A depressed level
of income does affect how much money people think they can “afford.”)
Market difficulties appear to pertain to sales of goods and services, not to
money.