The Emotions Dictating Money Supply Volatility

A brief argumentative analysis on the role human emotion plays in determining the relative value of money.

This article offers rebuttals to long standing economic arguments which stipulate monetary order is derived from either hegemonic powers or international institutions.

An Emotional Order

Times of economic growth or contraction are associated with a rise or decline in facets of educational, technological, political or monetary institutional developments. To measure the value of these changes, the global economic order has, historically, used a variety of monetary systems to regulate, measure and control money order volatility. Order is reliant on the stability and predictability of economic relations and policies, the openness and health of economic exchange and the respect for agreed-upon legal rules. Money serves as a medium of exchange and store of value therefore, the global economic state affects volatility of the money order via actors’ prevailing attitudes regarding monetary measurement of perceived economic health. The level of monetary order experiences relatively high volatility in response to unstable or unpredictable changes in real global economic output because money is an imperfect measure of value dependent on our emotions, beliefs and norms.

Determining money’s relative worth during an increase in the money supply is a daunting challenge with far reaching implications. As the supply of money increases, the price of money decreases thus rendering an increase in price of goods. In the beginning of the 20th century, the world experienced a phase of immense trade liberalization, and economic activity boomed. At that time, major currencies of the world were on the gold standard. As the economy grew, more stuff was manufactured and traded, driving down goods prices. The decline of goods prices was equivalent to a rise in the price of gold – as the price of a bushel falls by a half gold dollar, that same gold dollar could buy twice the amount of bushel. Because the gold dollar was now more valuable, people had an incentive to find more gold. Gold rushes occurred throughout the world, and the money supply was shocked with a large increase of new gold. As new gold increased the money supply, the value of gold decreased and, “a decline in the price of gold was the same as a rise in the price of goods; a reduction by half in the price of the gold that constituted the gold mark meant a doubling in the prices of goods in terms of gold marks. And so, the new gold supplies led to a generalized rise in prices” (16).[1] Money is an imperfect measure of value because as more goods are produced and traded, the relative price of goods decreases. In response, the supply of money increases because money becomes more sought after. This increase in money supply however drives down the price of money therefore increasing the price of goods and counteracting the initial goods price drop. This volatility is very difficult to accurately understand, measure or control. As the global economy undergoes changes, money responds in accordance, albeit imperfectly.

In modern times, the promise of money’s value is backed by the government. Known as fiat money, this method of monetary value relies upon faith and trust. Since the United States’ departure from gold in the early ‘70s, the level of order in money is still affected by the global economy. Because money’s backing with an object of real value (gold) no longer exists, monetary order is now more difficult to understand, and its volatile affects are felt more intensely on economic output. In the academic paper Money Supply Volatility and the Macroeconomy, researcher Libo Xu compiled monthly data in the U.S. from January 1967 to October 2016. Analyzing real output, industrial production and money measures the paper revealed money growth volatility reduces current real output growth rate by 0.3% at a monthly frequency.[2] The results show money growth uncertainty has a negative and statistically significant effect on output growth. Group behavioral psychology suggests people fear uncertainty, and when these fears are manifested by a reduction of global economic output, the level of order in money becomes unpredictable – people’s emotions concerning the economic state dictate the level of order in money.

Some argue hegemon control explains why the global economy affects the level of order in money. A hegemon is an all-powerful state, dominant in economic and military resources. Hegemonies provide economic order by establishing norms and agreements amongst countries while monitoring compliance, thus compelling actors to engage in trade practices fairly. Furthermore, they provide large amounts of capital through loans and bailouts which maintains monetary stability. At the end of the 19th century and beginning in the 20th, Great Britain was the indisputable global hegemon. Pro-trade groups politically influenced Great Britain’s economic policies and created a global economy which fostered both monetary stability and open trade. Under this system, almost every Western nation industrialized, and economic prosperity boomed. However, with the rise of foreign success, Britain’s position as a hegemon faded. Once Britain’s power began declining, many Britons began to contest free trade. Pushback was driven by the thesis argument list: British citizens’ emotions – displeasure with Britain’s declining rule, their personal beliefs – as hegemon, Britain and her citizens should prosper most and pre-existing norms – Britain was and should remain the economic leader. Competition against British manufacturing sparked debates over free trade, and protectionist measures began to rise. With the onset of WWI, economic order dissolved, the gold standard collapsed, and countries closed their borders to trade, immigration and investment. The declining state of the global economy created an incredibly volatile money order. The level of economic health experienced during the golden era would not be reached again until post-WWII. This time period demonstrates hegemonies, while helpful, are not the real reason why the global economic state affects the money order – peoples’ interpretations and responses to changing political and economic realities is the true cause.

Others argue international institutions more effectively achieve economic order than hegemonies. In the current economic era of the past 40 years, trade has been relatively open and stable, yet highly legalized. Once the Bretton Woods economic arrangement broke down in ’71, a new formal international trade organization was necessary. Known as the World Trade Organization (WTO), this institution administers international trade law and serves as a forum for inter-governmental negotiations and compliance checks. Through the WTO, countries can enter into Preferential Trade Agreements which eliminate barriers to trade. During the ‘90’s, the rise of technology, spurred by the WTO, drastically improved global connections and communication. Production became easy to disperse around the globe. Foreign direct investment skyrocketed and ran at $1 trillion per year by 2000. All this new wealth created a prosperous globalized economy, and the order of money was stable, as evidenced by controlled U.S. interest rates. It appeared global institutions were the solution to sustained economic growth. However, a tech bubble collapse in the early 2000’s, followed by a global financial crisis in 2008 and the emergence of China as a new economic superpower all threaten the order created by international institutions. Furthermore, international competition has reduced employment opportunities for many low wage industrial workers. As Professor Broz articulates in his essay, Populism in Place, the, “upsurge of hostility to some of the founding principles of the modern international economic and political order has now affected many advanced and industrial countries”.[3] This “upsurge of hostility” over the new economic reality is the reason why the global order is currently threatened. No model can accurately express the emotions people feel when affected by rapidly changing global circumstances - these emotions are the reason why the economic state affects the money order.

[1] Frieden, Jeffry. Global Capitalism: Its Fall and Rise in the Twentieth Century. New York, W.W. Norton, 2000. [2] Xu, L. (2020). MONEY SUPPLY VOLATILITY AND THE MACROECONOMY. Macroeconomic Dynamics, 24(6), 1392-1402. doi: S1365100518000901 [3] Broz, J. Lawrence. "Populism in Place: The Economic Geography of the Globalization Backlash." International Organization, May 202

An Emotional Order
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