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Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

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Chapter 6

The Policy of Stabilization

To begin the discussion in this chapter, we need to define the objective of a policy of price level stabilization. The advocates of price level stabilization and of central bank-controlled moderate inflation can have no objection to any moderate, trending, and therefore largely predictable changes in purchasing power, such as the secular deflation of commodity money. Their very own model entails just such on-trend purchasing power changes. What their system must achieve is to smooth out the potentially abrupt changes in purchasing power that may stem from sudden changes in money demand.

Problems with Price Index Stabilization

The first point to note is that once we made the transition from inflexible commodity money to practically unlimited, elastic fiat money the predictability of the price level has decreased, rather than increased. The notion that the price level could now be forced to be stable or predictable rests entirely on political will and state intervention. If left to their own devices, the fractional-reserve banks, which are the dominant money producers in a paper money system, have no incentive to produce exactly the amount of money that keeps the price level stable or on some predetermined path. In fact, they could not guarantee such an outcome even if they wanted to. Their interest must be to use the privilege of money production to their benefit (i.e., that of their shareholders) by lowering the interest rate on the loan market ...

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