On the Optimality of Satiation in Money Balances

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.. Wiley and American Finance Association are collaborating with JSTOR to digitize, preserve and extend access I. ONE vrEw now rapidly gaining ground in economics is that since contemporary credit money costs society nothing to produce, people ought to be encouraged to hold money up to satiation. This goal presumably could be attained simply by compensating people for the opportunity cost of holding money, that is, by paying enough interest on money to cut the net opportunity cost of holding the good to zero.' Strangely enough, though, no one has ever properly explained the whole notion of a satiation level with regard to money.If money is viewed as a production good, as is common in respect to firms, satiation with money must refer to a zero marginal product, or more specifically, a point where additional money ceases to economize on transaction costs. Why should such a point exist? For example, is there any reason why a sufficient abundance of money relative to other factors should inhibit the productivity of the rest? Alternatively, is there any cause why input substitutability between money and other factors should cease at some point? Why not a marginal product of money asymptotic to zero? Further, if a zero marginal product exists, this point can only be one of unique equilibrium under standard assumptions if increases in money beyond it yield a negative marginal product. How would this be explained?2In addition, the whole notion that a zero net opportunity cost of holding money would induce people to hold a satiation level of money balances depends on the assumption that all costs of storing and using money, such as safekeeping and check clearing, are independent of the money stock. That is, the storage of money and operation of the payment mechanism supposedly can be legitimately regarded as a social overhead cost. But it is certainly difficult to see why costs of safeguarding currency should be independent of the stock. Nor is it plain, and no one has ever tried to explain, why people should use the payment mechanism at the same frequency regardless of their demand deposits.3 Ordinarily physical rates of utilization are conceived as positively related to average stock size. Why not in the case of demand deposits? * Tulane University and Ministere des Finances, Paris 1. The seminal writings are George Tolley (1957, sec. III), and Milton Friedman (1960, pp. 72-73). However, express statements of the argument date only since 1965. See Friedman (1962); Harry G. Johnson (1968, p. 973); Alvin Marty (1968, 1969b); Edmund Phelps (1965); and Paul A. Samuelson (1968, pp. 9-10).2. Friedman's lone effort to answer this question (1969, pp. 17-18) will be treated below (n.8).3. The whole...