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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 7

A Brief History of State Paper Money

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, from competing currency providers, from the customization of money or from an active market in 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 necessarily sufficient to align demand for money with the fixed supply of money.

On the other hand, we have seen that replacing inelastic commodity money with elastic paper money must lead to economic dislocations, to the obstruction of the pricing process, to ongoing decline in money's purchasing power, and increasingly to economic disintegration.

So how can we explain that practically all economies are operating under paper money standards today? If money users derive no advantage from the abandonment of commodity money and the switch to paper money, how could the paper standard completely replace ...

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