Do We Need More Money?

August 2, 1965

Secretary Fowler wants an international conference on money. His proposal is based on the fear that unless the world develops “a new and assured source of growing liquidity”—i.e., more money and credit—there may not be enough “to support increasing world trade and investment.” Nearly all the proposals now being put forward for an “improved” international monetary system are based on the same fear-that we are running out of money.

There is nothing new about such fears. In 1875, the British economist Jevons was writing: “In almost every country great complaints have from time to time been made as to the scarcity of the circulating medium, and the urgent need of more. All the evils of the day, the slackness of trade, falling prices, declining revenue, poverty of the people, want of employment, political discontent, bankruptcy and panic, have been attributed to the want of money, the remedy suggested being . . . the issue of paper money.”

The truth is that, except in a deflationary crisis, the existing amount of money is always enough to conduct the business of the country—for the simple reason that it is the existing amount of money that has determined the existing level of prices. If, with other conditions remaining unchanged, we increase the supply of money, each unit of money will be worth less than before. This means that prices will rise.

NOT ENOUGH GOLD?

It is certainly true that, if the money supply is not increased while the economy is expanding, prices must tend to fall. But a gradual fall of prices for this reason is to be welcomed rather than feared. Prices would be falling because the supply of goods was increasing. And real costs as well as money costs of production would be falling along with them. So profit margins (and therefore incentives to production and employment) would tend to remain relatively unchanged.

This situation has often existed historically. Wholesale commodity prices dropped from an index number of 84.7 in 1880, the year after this country returned to the gold standard, to as low as 60.5 in 1896. They had recovered to 73 by 1900 and in 1911 were still only 84.4 (1939=100). Yet this whole 30-year period, though marked by both depression and prosperity, was a period of continuous and strong economic growth.

The opponents of the gold standard argue that there simply isn’t enough gold in the world to finance production and trade. So they want to supplement gold reserves with paper dollars or even with a new “composite reserve unit” of ten or eleven leading paper currencies. But if there isn’t enough gold for reserves and money, why not use silver? Or if we can’t spare silver at present, why not use copper? Or if there isn’t enough copper, how about iron?

SCARCITY GIVES VALUE

Of course each unit of currency would then buy less. It is precisely because gold is scarce that it is valuable as money. It is precisely because its scarcity, unlike that of paper money, cannot be relieved by the mere whim or ukase of political managers that gold holds its value.

Increasing the supply of money is chasing a will-o’-the-wisp. Every increase in supply lowers the value of the monetary unit and raises prices. In the end, the bigger supply of money doesn’t buy any more than, the smaller supply.

There is a shortage of gold in the world today only in one sense—that too much paper money has been issued against it, so that this paper money cannot be made freely convertible into gold at the old ratio. That is why so many people are asking for devaluation. But this would at best provide only temporary relief if the policy of currency and credit expansion continued.

In the twenty years of the International Monetary Fund system, the world has piled up a shameful record of inflation, depreciation and devaluation. Yet instead of demanding a return to balanced budgets and a true gold standard, everybody seems to be devising schemes to support still further inflation, under the Keynesian delusion that only constantly “increased purchasing power” through constant monetary expansion can assure prosperity.