" I believe the idea is that under a gold-backed currency, the money supply is limited by the amount of gold backing it, so when demand for capital increases, there can be no follow through for growth because the money supply is so inflexible. Many blame the gold standard(i know not all currency was backed and other shit), partially, for influencing the magnitude of the great depression because it’s said that the Federal Reserve was stuck, because it couldn’t increase they money supply at a time when capital needed to be injected into the system. People horded their cash and financial institutions couldn’t and would nott lend, and so the downward spiral continued."
Injecting ‘capital’? There is a sense in which the term injection is wholly applicable (doping comes to mind), but capital is not what’s being injected in this case…
It’s quite obvious this person is simply rpeatign what they memorized in econ 101, but how do I respond? What will cause growth in an economy with relatively fixed amounts of currency? (of coruse gold minign and such will occur but not at the rate of the Fed’s inflationary practices).
I’m in the middle of reading the following (which looks like it deals with the exact argument you’re talking about) http://mises.org/rothbard/agd.pdf
The subject was debated by Keynes and Hayek back when it actually happened, of course. Hayek’s work earned him a nobel prize - although his books and other writings are a better testiment to his excellence than any prize. So if you want the real answer to this then you’re best off reading Hayek and possibly Rothbard (above).
I also posted a question about sticky prices which is related to this - you’ll see a number of good posts/replies in that thread too.
This argument supposes that capital (by which they simply mean money) isn’t subject to the same laws of supply and demand as every other commodity. There will be no shortage of money if the interest rate is allowed to float freely. What proponents of a “flexible” money supply are really after is money they can borrow without having to bid for it.
“Elasticity of the Money Supply!” was the best political campaign slogans ever. It just seems to mean when we are ready for more money we should get it. Who wouldn’t vote for that?
That doesn’t make any sense at all to me. If there is a growth in goods and services provided, or capital, or anything else in an economy, while the supply of money stays stable, then all that will happen is the purchasing power of the money will rise. Who cares how much money there is in circulation? It’s value will adjust to the amount of goods whenever this is necessary.
I think the only time deflation and inflation cause problems in a system of a fixed supply of money, is when there are government restrictions on nominal wages, and other price fixing. At which point in time nominal costs fail to adjust in line with inflation/deflation, and so we have a change in real terms, disrupting the normal market functions.
If I understood you correctly you seemed to be arguing that it didn’t matter how much money was in circulation since prices would adjust. I was just pointing out that pre-existing debt contracts don’t adjust. Somebody gets burned. Of course that’s going to happen anyway when prices change for natural reasons; but that doesn’t justify artificially altering the money supply.
It’s kinda hard to predict future inflation though - especially when pricing long term debt. More importantly, when inflation is caused by the Fed artificially depressing interest rates there cannot be a rise in interest rates to compensate savers/creditors.
The problem with the ‘inflexible money supply’ doesn’t really show up until the effects of an inflated money supply starts to collapse under its own weight. Loans and such get called to shore up the financial institutions who merrily went about with their counterfeit warehouse receipts business during the boom times and when the inevitable bust comes they have no way to back the amount of money in circulation if they’re tied to a commodity. They can’t inflate their way out of the bust as the current Fed is hell bent on doing today and so have no hope of papering over the mess they created while getting the government to redistribute their losses to the population at large.
In Rothbard’s The Case Against the Fed he goes into the reasoning and history behind the ‘inflexible money supply’ argument as it relates to the creation of the Federal Reserve.