[ianai]

Let’s also not forget the tie between inflation and GDP. It’s pretty hard to grow an economy if you literally have to dig new currency out of a mine and certify its quality before adding it to the economy. There are very real deflationary pressures from the mere machinations of such a currency.

[skookumchuck]

The way free banking works is money is created to match the increase in asset value. There is no net inflation, but the money supply rises in concert with the value in the economy. The amount of metal does not need to increase.

[ianai]

That’s only one possible situation and not the overall preference. Small amounts of inflation, 1-3%, offer some helpful benefits. They offer companies a way to decrease wages otherwise held constant but not tracking decreases in output or marginal value (though I’d argue that’s not a great thing nor common - but is necessary to clear markets). They also act as a tax on holding currency. That’s helpful to the economy at large-you can literally lose 1-3% of your cash per annum or you can spend 1-3% of your holdings on goods/services you otherwise wouldn’t employ. There’s also a wealth transfer mechanism at play, in aggregate of such things. Further, there is a connection between money supply and gdp growth. Your money supply has to expand for the economy to expand.

Contrast that with the impacts of deflation: If you know you’ll be able to buy more tomorrow with the same money, you’ll often choose to wait.

Because companies see fewer revenue for the same goods/services they have to cut costs - unemployment balloons.

Fewer people employed decreases demand overall. Leading to still more layoffs.

The deflationary forces spiral the economy lower and lower.

Any debt a person holds becomes dramatically more difficult to pay as their income decreases.

And all because the money supply remained constant or decreased in circulation.

[skookumchuck]

> The deflationary forces spiral the economy lower and lower.

With free banking, there won't be net deflation either, as the market forces on the creation/destruction of money prevent it.

As pretty strong evidence, there was no net deflation or inflation in the US dollar from 1800 to 1914, while the economy grew from subsistence farming to superpower.

To argue that this cannot work, one must explain that.

[bildung]

Inflation was as high as 25% a year in the 1860s, and deflation as high as 10% in the 1840s; where is your idea of zero inflation in the 19th century coming from?

The one thing that changed in the 20th century is the absence of severe deflationary crises. Inflation in the 20th century is actually way less volatile than in the 19th century, but absent deflational periods those low levels of inflation compound over the decades.

source: http://liberalarts.oregonstate.edu/sites/liberalarts.oregons...