We Don’t Need a Central Bank to Deal with Changes in the “Demand for Money”
Historically, many different goods have been used as money. On this, Ludwig von 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
Similarly, Murray Rothbard wrote in “What Has Government Done to Our Money,”
Just as in nature, there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisible into smaller units without loss of value, some more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as the media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium, which causes more marketability, etc. Eventually, one or two commodities are used as general media-in almost all exchanges-and these are called money.
Through the ongoing process of selection, people settled on gold as their preferred medium of exchange. Some commentators, cast doubt 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 growing fast enough. On this according to Insider from June 15, 2011,
The basic problem is that the supply of gold is not related to the quantity of goods and services being produced………. As a result of this scarcity, prices decline. Individuals have less incentive to produce new goods and services. Economic growth is stifled. Allowing money to become scarce does the greatest harm to those who have the least. In the past, the relative inflexibility of the monetary system contributed to the chronic lack of growth in many of the world’s less developed countries. Since the 1970s, we have had one of the most flexible monetary systems the world has known, and many of these countries have flourished. With a flexible monetary system, more money can be created to accommodate more growth.2
On this way of thinking, the free market, by failing to provide enough gold, is going to cause money supply shortages. This, in turn, runs the risk of destabilizing the economy.
Again, following this way of thinking a growing economy requires a growing money stock, because economic growth gives rise to a greater demand for money, which must be accommodated. Failing to do so it is held, is likely to result in a decline in the prices of goods and services, which in turn is likely to destabilize the economy and lead to an economic recession or, even worse, depression.
Hence, to prevent various economic shocks emanating from imbalances between the demand and the supply of money it is held that the Fed must keep the supply and the deman
Article from Mises Wire