Is There an Optimum Growth Rate of Money?
It is widely held that a growing economy requires a growing money stock because economic growth increases demand for money. Many economists also believe that failing to accommodate the increase in the demand for money leads to a decline in consumer prices. This could destabilize the economy and produce an economic recession or even a depression.
Some economists who follow 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, it will create economic stability.
The idea that money must grow to support economic growth implies that money sustains economic activity. However, money’s main job is to be a medium of exchange, not sustain economic activity. Instead, economic sustenance is provided by saved consumer goods.
As for money, many different goods have served as a medium of exchange. Ludwig von Mises wrote 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.”
Over thousands of years, people have settled on gold as their preferred medium of exchange. Most economists, while accepting this historical evolution, doubt that gold can serve as money in a modern economy because of gold’s limited supply.
This, in turn, risks destabilizing the economy. Hence, most economists, even those who express support toward the idea of a free market, believe the government must control the money supply.
What Do We Mean by Demand for Money?
Demand for money is the demand for money’s purchasing power. After all, they don’t want more money for its own sake; they want more purchasing power. In a free market, supply and demand determine the price of money. If there is less money its exchange value will increase, and the exchange value will fall w
Article from Mises Wire