The Price of Money

My best friend is an economist and we frequently have discussions about political economy. I don't write about the things I discover from those precious conversations nearly enough. As a result I forget some of the more specific things and have a lot of unnecessary repetition. So, this is just the latest thing and I'll try to be more consistent about documenting my thoughts. He has a much more thorough write-up, as he's the economist, on his blog.

The current consensus of what a currency is worth apparently is: the price of money is the interest rate. Never mind which interest rate, lets just say all interests rates. This is because one charges a price, some amount of money, which is interest for one's money.

I disagree.

First of all, you are not trading money for money; that would be ridiculous. What you are trading is the temporary use of your money for money. You trade a service for a price. So interest rates are not indeed the price of money, but the price of the use of money. Which is why one charges more interest for more potentially 'damaged'/lost money, that's called risk.

Secondly, if we were to determine the price of money we couldn't get an accurate price by assessing only one thing for which it is traded [i.e. the use of money]. When determining the relative price of money we need to consider all of the ways in which it is paid for. For example, when one buys money with a delicious coffee beverage [Starbucks], how much delicious coffee beverage must one pay for the money? Many different kinds of goods and services, including the use of money, are exchanged for money but only looking at one such instance can't tell you what the currency is relatively worth; only the collective productive effort that you can buy with it can.

So the price of money is not its interest rate, but its overall purchasing power.