Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

750 Money, Bank Credit, and Economic Cyclesreplaced by another much more stable and sustained one. Infact, not only would artificial expansion be prevented, alongwith the stress it involves at all levels (economic, environmental,social, and personal), but the recessions which inevitablyfollow each period of expansion would be prevented as well.In the proposed model, the monetary system would be rigidand inelastic with respect to the money supply, both in termsof growth in the quantity of money in circulation and, especially,possible decreases or contractions in it. Indeed a 100-percentreserve requirement would preclude an expansionaryincrease in the money supply in the form of loans, and thequantity of money in circulation would simply grow naturallyand would be tied to the annual rise in the worldwide stock ofgold. The worldwide stock of gold has grown at an average ofbetween 1 and 3 percent per year over the last 100 years. 49Therefore, with a monetary system comprised of a pure goldstandard and a 100-percent reserve requirement for banking, ifwe assume productivity mounts at an average rate of 3 percentper year, this model of economic growth would give rise to agradual, constant drop in the prices of consumer goods and services.49 See Skousen, “The Theory of Commodity Money: Economics of a PureGold Standard,” in The Structure of Production, pp. 269–71. Skousen alsoexplains that, given the unchanging nature of gold, the worldwide stockof it accumulated throughout history only rises and does not decline.Therefore, other things being equal, if the volume of gold producedworldwide remains constant, the money supply will increase by lessand less, in terms of percentage. However this circumstance is compensatedfor by technological improvements and innovations in the miningsector, which have determined that, on average, the worldwide stock ofgold has risen from 1 to 3 percent per year since 1910. Mises, for his part,indicates that the annual increase in the worldwide stock of gold tendsto match the gradual, enduring rise which population growth causes inthe demand for money. Hence if demand mounts from 1 to 3 percent (arate similar to that of the increase in gold), prices will drop by around 3percent per year and nominal interest rates will fluctuate between 0.25and 1 percent (assuming general economic productivity increases by 3percent, on average). See Human Action, pp. 414–15. Mises does notmention that healthy, long-lasting deflation caused by growth in productivitytends, ceteris paribus, to reduce the demand for money, allowingfor higher nominal rates of interest.