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Does a Growing Economy Require an Expanding Money Supply?

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Most economists hold that a growing economy requires a growing money stock, on grounds that an economic growth gives rise to a greater demand for money which 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.

 Now on a gold standard if one takes into account that a large portion of gold mined is used for jewellery, this leaves the stock of money almost unchanged over time.

It is held then that the free market, by failing to provide enough gold, can cause money supply shortages. This in turn, runs the risk of destabilizing the economy.

The whole idea that money must grow in order to sustain economic growth gives the impression that money somehow sustains economic activity.

If this were the case, then most Third World economies would have eliminated poverty by now through printing the large quantities of money.

According to Rothbard,

Money, per se, cannot be consumed and cannot be used directly as a producers' good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing.

Money's main job is simply to fulfill the role of the medium of exchange. Money doesn't sustain or fund real economic activity. The means of sustenance are provided by saved real goods and services.

By fulfilling its role of the medium of exchange, money just facilitates the flow of goods and services.

In a free market, in similarity to other goods, the price of money is determined by supply and demand.

Consequently, if there is less money, its exchange value will increase. Conversely, its exchange value will fall when there is more money.

Hence within the framework of a free market, there cannot be such a thing as "too little" or "too much" money. As long as the market is allowed to clear, no shortage of money can emerge.

Consequently, once the market has chosen a particular commodity as money, the given stock of this commodity will always be sufficient to secure the services that money provides.

According to Mises:

As the operation of the market tends to determine the final state of money's purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great, or small. . . . the services which money renders can be neither improved nor repaired by changing the supply of money. . . . The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.


Contact Frank Shostak

Frank Shostak's consulting firm, Applied Austrian School Economics, provides in-depth assessments of financial markets and global economies. Contact: email.

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