Flasks Of Money

<chirp, chirp> “Moire here.”

“Hiya, Sy, it’s me again.”

“Hi, Eddie. I thought you were done with your deliveries tonight. That was a good stromboli, by the way, just the right amount of zing and sauce.”

“Thanks. Yeah, I’m done for the day, but I was thinking while I drove home. We said that the Feds and the banks together can tinker with the money supply so there’s no Conservation of Money like we got Conservation of Energy. But then we said that it matters to keep money in local businesses instead of letting it drain away somewhere else. That says there’s only so much to go around like the amount doesn’t change. So which is it?”

“Good point. You’ve touched on another contrasting parallel between Physics and Economics. In Physics we mostly understand how atoms work and we’ve got a pretty good handle on the forces that control objects big enough to see. J Willard Gibbs, probably the foremost physicist of the late 1800s, devised Statistical Mechanics to bridge the gap between the two levels. The idea is to start with the atoms or molecules. They’re quantum objects, of course, so we can’t have much precise information at that level. What we can get, though, is averages and spreads on one object’s properties — speed, internal energy levels, things like that. Imagine we have an ensemble of those guys, mostly identical but each with their own personal set of properties. Gibbs showed us how to apply low-level averages and spreads across the whole ensemble to calculate upper-level properties like magnetic strength and heat capacity.”

“Ensemble. Fancy word.”

“Not my word, blame Gibbs. He invented the field so we go with his terminology. Atoms weren’t quite a respectable topic of conversation at the time so he kept things general and talked about ‘macroscopic properties‘ which we can measure directly and ‘microscopic properties‘ which were mysterious at the time. Think of three flasks holding samples of some kind of gas, OK?”

“No problem.”

“The first flask is stoppered, no gas can get in or out but energy can pass through the flask’s wall. Gibbs would call the confined collection of molecules a ‘canonical ensemble‘. Because the wall transmits energy we can use an external thermometer to measure the ensemble’s temperature. Other than that, all we know about the contents is the number of particles and the volume the particles can access.”

“Canonical?”

“In Gibbs’ usage it means that he’s pared things down to an abstract essence. It doesn’t matter whether what’s inside is atoms or fruitflies, his logic still holds. Now for flask number two. It’s heavily insulated so whatever energy it had inside originally, that’s what it’s got now. We can’t measure the temperature in this one. Gibbs would consider the particles in there to be a ‘microcanonical ensemble,’ with the ‘micro’ indicating the energy restriction.”

“Where there’s a microcanonical there’s gotta be a macrocanonical.”

“You’d think, but Gibbs used the term ‘grand canonical ensemble‘ instead. That’s flask number three, which has neither insulation nor stopper. Both energy and matter are free to enter or leave the ensemble. Gibbs’ notion of canonical ensembles and the math that grows out of them have been used in every kind of analysis from solid state physics to cybersecurity.”

“OK, I think I see where you’re going here. Money acts sorta like energy so you’re gonna lay out three kinds of economy restriction.”

“You’re way ahead of me and the economists, Eddie. They’ve only got two levels, though they do use reasonable names for them — microeconomics and macroeconomics. For them the micro level is about individuals, businesses, the markets they play in and how they spend their incomes. Supply-demand thinking gets used a lot.”

“That figures. What about macro?”

“Macro level is about regions and countries and the world. Supply‑demand plays here, too, except the macroeconomists worry about how demand for money itself affects its value compared to everything else.”

“They got bridges like Gibbs built?”

“Nope. Atoms are simple, people are complicated. The economists are still arguing about the basics. Anyway, the economists’ micro level assumes local money stays local and has a stable value.”

“Keeping my business stable is good.”

~~ Rich Olcott

What Goes Around

<shout from outside my office door> “Stromboli Express. Get ’em while they’re hot!”

“The door’s open, Eddie, and you’re right on schedule.”

“I aim to please, Sy. Which ain’t easy while I’m wearing this virus mask.”

“On you it looks good, Eddie. Just leave the order on the credenza. How’s my account?”

“Still good from that last twenty. I gotta say, I appreciate you keeping your tab on the plus side. You, Vinnie, all you singles, your orders are keeping me in business despite that corporate PizzaDoodle shop that opened up.”

“Doing my part to keep the money local, Eddie. Besides, you do good pizza.”

“What difference does keeping the money local make? Anything to do with money being energy?”

“Whoa, where did that come from?”

You told me, Sy. When prices get higher than a perfect supply‑demand market would set them, it’s from inefficiency like what happens to machine energy that gets turned into heat by friction.”

“Ah, you stretched my metaphor a little too far. Money behaves like energy in some ways but not in others. For one thing, Conservation of Energy applies universally, we think, but Conservation of Money not so much.”

“The dollars in my wallet don’t multiply, that’s for sure.”

“Individuals aren’t allowed to fiddle the money supply — that’s called counterfeiting. But the 1930s Great Depression taught us that purposefully creating and destroying money is part of the government’s job. Banks can vary the money supply, too, sort of.”

“Yeah, I’ve seen videos of the Mint’s printing presses and them grinding up ratty old used bills.”

“That’s the least of what they do these days. Depending on which way you define ‘money’, only about a fifth of the money supply is cash currency.”

“There’s definitions of money?”

“Mm-hm. That’s one of the keys to the part the banks play. One definition is just the currency, like you’d think. The economists pay attention to a broader definition. When you deposit tonight’s receipts in the bank, the cash doesn’t just sit in a vault. For that matter, your credit card and debit card take can’t sit in a vault. What does the bank do? It keeps a certain percentage of its deposited dollars as a reserve in case you want to pull dollars out to pay Joey for his sausage or something. The rest of those dollars can be loaned out. The loaned dollars generally get deposited for a while before they’re spent and a fraction of those deposits can be loaned out … you see where this is going.”

“Whoa, so I put on a hundred and that turns into maybe four, five hundred or more by when the dust settles. I see what you mean about banks creating money even if it’s not real money.”

“Oh, it’s real money — officially blessed marks in a ledger or more likely, bits in computers instead of paper and coins, but it counts. Anyhow, the second definition of ‘money’ is combines currency and deposits from all those loans.”

“So what’s to prevent the bank from loaning out all their money and riding this pony over and over again? That’s what I’d want to do, pull in interest on like, infinite loans.”

“That’s where the government steps in. Depositors need to be sure they can make withdrawals. The Feds don’t tell banks, ‘You can only loan out a certain number of dollars.‘ What they do say is, “Your reserves have to total up to at least x fraction of your deposits.’ The Feds are free to change the value of x up or down depending on whether they want to shrink or expand the money supply.”

“Closing down or opening up the spigot and Conservation of Money ain’t a thing, gotcha. But what does that have to do with you guys keeping money local?”

“Think back to that $20 bill that went from you to Vinnie to Al to me to you. What would have happened if Al had decided to invest in some weird coffee beans instead of buying those magazines from me?”

“The dollars would fly away from our local bank and they wouldn’t be there for an x fraction loan for my business. Gotcha.”

~~ Rich Olcott