I have been reading about free banking, and something is still aching me. In free banking, in what manner does one increase or decrease their demand for money.
In the market for apples I simply go up to the store or leave when I want to change demand.
If I want to increase or decrease my cash balances I sell or buy goods or financial assets to get cash in return.
But how would this work under free banking. Would I go up to the banks and ask for free cash. How would they increase or decrease the total money stock in response to my requests/demands?
Does free banking need fractional reserve banking to work. Can it work without?
The purchase of apples shows that you have greater demand for the apples than for the money you gave up to get them. If you buy more apples, ceteris paribus, we can say your demand for apples is greater and your demand for money is less. Conversely, if you buy fewer apples, ceteris paribus, we can say the opposite. So, the demand for money is the same as the demand for cash balances, that is, the amount of liquid savings you keep on hand. The more money that people save instead of spend or invest, the higher the demand for money. The more money that people spend or invest, the lower the demand for money.
You might say, “Yeah, but the amount of money in, for example, a gold coin economy would be the same at the end of the day, regardless of whether people spend, save or invest” but this is not true. As people increase their demand for money (save more, spend and invest less), the price of consumer goods will decrease which increases the purchasing power of money. As money becomes more valuable, more of it will be mined, thus increasing the money stock. Hence, increase in demand for cash balances drives money production. It also interacts with the interest rate, as Guido Hulsmann explains in this wonderful article.
However, I am confused. When you say… “As money becomes more valuable, more of it will be mined, thus increasing the money stock. Hence, increase in demand for cash balances drives money production.”
How does that actually happen. How does this actually happen step by step
How does, “thus increasing the money stock” happen? What is “money production”?