You asked me to comment on your post. Your question reveals the typical confusion between Credit and Money. You'll see that you even use these terms interchangeably - but they're not the same thing. And understanding the difference is the key to understanding economics.
. . . wars can and have been fought on a gold or other commodity standard, but when the government is allowed to expand the money supply it can raise more money." . . . when the barbarians are at the gate and defenses have to be rapidly built up? Will they never use credit under any condition?
I believe you have two questions. If you have others, you can ask.
1.) I assume your first question is, or should be: can an economy experience price inflation with a fixed money supply and variable credit?
Answer:) Yes. As the credit supply increases, this will tend to push up prices, but these prices will decline when total use of credit contracts. As long as you don't change the money supply you can't have any inflation that is not temporary due to a change in the use of credit.
If a bomb blows up all of your factories, this may cause a temporary shortage and higher prices until the factories are rebuilt. But the bomb also causes a permanent loss of wealth. So the fixed amount of money would represent less wealth - and that's going to appear as price inflation. Each unit of money will buy less, because there is less. Austrian economists likely don't call this inflation, but that's a distinction without a difference. Likewise, as the society becomes wealthier, it will experience price deflation. What do Austrian economists call this price deflation? Frankly, who cares? I can explain economics, but I'm not an Austrian Theologen. An authorized Austrian Theologen can explain how they define what the meaning of is is, if you can find one.
2.) I assume your second question is, wouldn't an increase in money supply be useful in a time of great need?
Answer:) No, an increase in money would not be helpful except as a method of theft. If a government requires funds, it can obtain the money by tax, credit or theft. Increasing the money supply is theft through a counterfeiting fraud. The advantage of theft is you don't need the agreement of those who would lend, and don't need to spend the overhead and time to find assets to tax.
To understand these two answers, it's VERY important to understand the difference between Money and Credit. In the current system we live under, they appear to be nearly indistinguishable and some will claim that the entire system is one of credit without money. But no one at the Fed believes this. The distinction between credit and money is quite clear to them, even if the difference is lost on others.
To address your scenario let's first construct a system with a finite amount of money, and credit as much as those who can lend desire to lend to those who would borrow. It's possible to have this sort of system with or without a central bank or treasury, and with or without gold. Gold is merely a discipline which makes it tough for the system to cheat. I'd suggest you visualize money as gold coins to help you understand the concept, but gold is not necessary.
When Monetarists use the term "money supply", they are offering up a confused mixture of money and credit, and they then talk about monetary velocity as the turn-over in this credit-money. All confusing rubbish.
Credit is merely an increase in monetary velocity. This may sound stranger still, but follow along.
Paper currency, the check, and the Visa charge, are all NOT money. Instead, these all increase the credit capacity of banks by weaning the public from the habit of using our hypothetical gold money coins. Thanks to this ingenious social device a large part of the sums deposited with the banker is used by him to grant credits to borrowers, while at the same time it remains at the disposal of its owners for making payments to each other. That is the entire "mystery" of credit.
But in all this there is no increase in money, there is merely a more rapid circulation of existing money. Henry Thornton, whose perceptions were very sharp, saw this quite clearly: “If at any given moment an inventory were made of the wealth of a society, the notes issued by the bank, included among the bearer's assets, are counterbalanced by commercial drafts among the liabilities of the signatory; credit and debit equal each other and cancel each other out.”
. |
