Paper Money Collapse: The Folly of Elastic Money, 2nd Edition

Chapter 7A Legacy of Failure

Once a commodity of essentially fixed supply becomes generally accepted as a medium of exchange, society can reap all the benefits from the use of money and all the advantages from indirect exchange by using this type of money. Nothing can be gained from ongoing money production, whether private or public, or from competition between currency providers or between alternative monies. Obviously, competition and innovation still matter for all sorts of financial services related to money. Here, the same rules apply that apply to all goods and services that have use value. But no economy needs an expanding supply of the medium of exchange. People buy and sell the monetary asset according to their individual demand for money, and this will lead to changes in the purchasing power of the monetary asset, which are sufficient to align demand for money with the fixed supply of money.

Money will never be “neutral.” Changes in money demand affect the monetary unit’s purchasing power but also change relative prices and thus feed back into the “real” economy. Such disturbances are the price we have to pay for enjoying the incalculable advantages of indirect exchange, of trading with the help of money. We have also seen that whatever disturbances emanate from money, they are vastly greater in a system of elastic money. Replacing inelastic commodity money with elastic paper money must lead to economic dislocations, to the obstruction of the pricing process, to ongoing ...