Money Mischief_ Episodes in Monetary History - Milton Friedman [14]
The existence of initial distributional effects has, however, one substantive implication: the transition can no longer, even as a conceptual possibility, be instantaneous, since it involves more than a mere bidding up of prices. Let prices double overnight. The result will still be a disequilibrium position. Those individuals who have picked up more than their pro rata share of cash will now have larger real balances than they want to maintain. They will want to spend the excess, but over a period of time, not immediately. On the other hand, those individuals who have picked up less than their pro rata share will have lower real balances than they want to maintain. But they cannot restore their cash balances instantaneously, since their stream of receipts flows at a finite time rate.
This analysis carries over immediately from a change in the nominal quantity of cash to a once-and-for-all change in preferences with respect to cash. Let individuals on the average decide to hold half as much cash, and the ultimate result will be a doubling of the price level, a nominal income of $40,000 a year with the initial $2,000 of cash.
This simple example embodies most of the basic principles of monetary theory:
The central role of the distinction between the nominal and the real quantity of money.
The equally crucial role of the distinction between the alternatives open to the individual and to the community as a whole.
3. The importance of attempts, as summarized in the distinction between ex ante and ex post. At the moment when the additional cash has been picked up, desired spending exceeds anticipated receipts (ex ante, spending exceeds receipts). Ex post, the two must be equal. But the attempt of individuals to spend more than they receive, even though doomed to be frustrated, has the effect of raising total nominal expenditures (and receipts).
Let us now complicate our example by supposing that the dropping of money, instead of being a unique, miraculous event, becomes a continuous process, which, perhaps after a lag, is fully anticipated by everyone. Money rains down from heaven at a rate that produces a steady increase in the quantity of money, let us say of 10 percent a year.
Individuals could respond to this steady monetary downpour as they ultimately did to the once-and-for-all doubling of the quantity of money, namely, by keeping their real balances unchanged. If they did this, and responded instantaneously and without friction, all the real magnitudes would remain unchanged. Prices would behave in precisely the same manner as the nominal money stock, rising from their initial level at the rate of 10 percent a year.
Again, while people could behave that way, they would not. Before the helicopter arrives, our representative individual could spend all his income and add nothing to his cash balances, yet the cash balances would remain equal to 5.2 weeks' income. They remained constant in real as well as nominal terms because prices were stable. Storage costs and depreciation costs were zero, as it were.
Now that the representative individual is getting cash from the helicopter, he can keep his real cash balances at 5.2 weeks' income from the sale of services only by adding all the extra cash to his nominal balances to offset rising prices. However, the money from heaven seems to be a bonanza enabling him to do better. If he reduces his cash balances by $1.00 over a year, he can now increase his consumption at the rate of $1.10 per year, whereas before he could have increased his consumption at the rate of only $1.00 a year. Since he was just on the margin before, he will now be over the margin. Storage and depreciation costs are now 10 cents per dollar per year, instead of zero, so he will try to hold a smaller real quantity of money. Suppose, to be specific, that when prices are rising at