Creating More Money Won’t Revive the Economy


In response to the corona-virus, central banks worldwide are pumping massive amounts of money. This pumping, it is held, is going to arrest the negative economic side effects that the virus-related panic inflicts on economies. As appealing as it sounds we suggest that this view is erroneous.

By Frank Shostak

The view that more money [printing / Q.E.] can revive an economy is based on the belief that money transmits its effect through aggregate expenditure. With more money, people spend more and the rest follows. Money then, in this way of thinking, is a means of payment and funding.

Money, however, is not the means of payment but a medium of exchange. It does not have a life of its own; it only enables one producer to exchange one’s produce for the produce of another.

The means of payment is always real goods and services, which pay for other real goods and services. All money does is facilitate payment, it makes payment for goods and services possible.

Thus, a baker exchanges bread for money and then uses money to buy shoes. Money just allows payment. Also, note that the baker’s production of bread gives rise to the demand (need) for money.

When we talk demand for money, what we mean is the demand for money’s purchasing power. People do not want a greater amount of money in their pockets so much as they want greater purchasing power in their possession.

On this Mises wrote,

The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power.

Ludwig von Mises, Human Action, 3rd revised edition (Contemporary Books 1966) p 421.

Similarly to other goods, the price of money is determined by supply and demand. If there is less money, its exchange value increases. Conversely, the exchange value falls when there is more.

Within a free market framework, there can be no such thing as “too little” or “too much” money. As long as the market is allowed to clear, no shortage (nor excess) of money can emerge.

Once the market chooses a particular commodity as money, the given stock of this commodity must always be sufficient to secure the services that money provides. Hence, in a free market, the ‘optimum growth rate of money’ is absurd.

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.

The purpose of production is consumption. People produce and exchange goods and services to promote their life and well-being, their ultimate purpose.

Consumption does not arise without production, production without consumption is meaningless. In a free market economy consumption and production are in harmony.

The baker can consume bread and shoes from the production of bread. Thus, a portion of his bread goes to direct consumption, whilst a portion pays for shoes. Consumption is backed by production.

Monetary pumping generates demand, which is not supported by production. This type of demand undermines real savings, weakens the formation of real capital and stifles rather than boosts economic growth.

October 13, 2011: Ron Paul; Printing More Money Is NOT the SolutionTulsaLiberty

It is real savings and not money that funds production of better tools and machinery, which make it possible to lift production of final goods and services, this is what economic growth is.

Contrary to popular thinking, unbacked-by-production monetary pumping only stifles economic growth. The only reason past loose monetary policies seemed to ‘work’ is because real savings generation was strong enough to absorb increases in unbacked consumption.

Once, however, the pace of unbacked consumption reaches a stage where real savings weaken, the economy falls into severe recession.

Any attempt then to pull the economy out of a slump by means of more [money] pumping exacerbates unbacked or non-productive consumption, thereby destroying real savings.

The collapse in the sources of real economic growth exposes commercial banks’ fractional reserve lending and raises the risk of a run on banks. Consequently, to protect themselves banks curtail the creation of credit out of “thin air”.

Under these conditions, further monetary pumping cannot lift banks’ lending. On the contrary, more pumping destroys real savings and businesses. Neither the central bank nor the government are wealth generators. This means any measures government undertakes must be at the expense of wealth generating activities, [thusly] weakening the ability to generate [real] goods and services.

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

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Source Mises Wire
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