There Is No “Optimum” Growth Rate for the Money Supply
Most economists hold that a growing economy requires a growing money stock on the grounds that growth gives rise to a greater demand for money that must be accommodated. Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession or, even worse, depression.
Since growth in money supply is of such importance, it is not surprising that economists are continuously searching for the right, or the optimum, growth rate of the money supply.
Some economists who are the followers of Milton Friedman—also known as monetarists—want the central bank to target the money supply growth rate to a fixed percentage. They hold that if this percentage is maintained over a prolonged period of time it will usher in an era of economic stability.
The idea that money must grow in order to support economic growth gives the impression that money somehow sustains economic activity. However, money’s main job is simply to fulfill the role of the medium of exchange. Money does not sustain or fund economic activity. The means of sustenance, or funding, is provided by saved final consumer goods. By fulfilling its role as the medium of exchange, money just facilitates the flow of goods and services between producers and consumers.
Historically, many different goods have been used as the medium of exchange. On this, Mises observed that over time
there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money.1
Through the ongoing process of selection over thousands of years, people settled on gold as their preferred general medium of exchange.
Most economists, while accepting this historical evolution, cast doubt on the idea that gold can fulfill the role of money in the modern world. It is held that, relative to the growing demand for money because of growing economies, the supply of gold is not adequate.
Furthermore, if one takes into account the fact that a large portion of gold mined is used for jewelry and various industrial purposes, this leaves the stock of money almost unchanged.
Article from Mises Wire