[AnthonyMouse]

> But the inability of people to pay for things because of the Fed's unwillingness to loosen credit caused people to lose faith in the value of their claims on future wealth, and that caused an actual reduction in productivity over time.

It wasn't the claims on future wealth (i.e. money) that they lost faith in, it was their job security.

You see the stock market crash so you tighten your belt in anticipation of potentially losing your job. So does everyone else. So people don't buy things which means companies don't need workers to make them and people lose their jobs. Then people who lose their jobs don't spend money, and people see people losing their jobs and tighten their belts even more for fear they're next, and you get a deflationary spiral.

You can lay this on the Fed for not providing enough liquidity, but the real reason this happens is that the Fed is the only one allowed to do it.

Suppose you're a candlemaker in the US during a deflationary spiral. Nobody will give you dollars for your candles. However, someone might give you euros or pesos or something like that. But now you have to pay your rent. If you can pay it in pesos, you're all set. If you can't, you have to buy dollars with pesos, which bids up the price of dollars and accelerates the deflationary spiral.

The problem comes when the government privileges its own currency. If you can't easily get a bank account denominated in another currency without converting it to dollars, if you can't pay your taxes in pesos even when that was what you received from the buyer, then people still have to convert the other currency into dollars and continue the deflationary spiral.

Whereas without that government restriction, a shortage of dollars would be resolved by using something more available as the medium of exchange.

[dzdt]

At the time of the great depression, every important currency was on a gold standard. So in an important sense there was only one currency: gold. The impossibility of increasing currency supply because of the gold standard is recognized as a major contributor to the depression.

[AnthonyMouse]

Even when countries were on the gold standard, they still had fractional reserve banking. If a troy ounce of gold was $100 , the bank had one ounce of gold and three separate people had a $100 bill, any one of them could go to the bank and get the gold, as long as not all of them did.

It's also possible to have a gold standard without holding your reserves in gold. The bank could hold them in anything -- other metals, bonds, real estate -- and then exchange that thing for gold in the market in the event that the customer comes for it, which they only do if they lack confidence that the bank will be able to make good, which doesn't happen when the bank is holding valuable assets. And then you can create as much "money" as you need by, for example, making mortgage loans backed by real estate.

You can still get into trouble there if the value of the assets declines (see 2008 housing crash), but that's a different kind of problem than the original one with separate methods to avoid it.

[headShrinker]

> Even when countries were on the gold standard, they still had fractional reserve banking. If a troy ounce of gold was $100 , the bank had one ounce of gold and three separate people had a $100 bill, any one of them could go to the bank and get the gold, as long as not all of them did.

Fractional Reserve is easier to understand as debt than as an asset. A bank is given $1000 from a central bank. The bank can now loan that $1000 with interest for a total of $1100. The bank is allowed to loan that debt promise at a fraction reserve rate of 7-1 or 5-1 as loans to other customers. The $1100 promise can be loaned as $800 plus interest for the total loan value of $880. That can then be loaned out as $660 including interest. Then $440 can be loaned out. Then $220.

So the original $1000 from the central bank was used to create $3300 worth of debt.

Money is created using debt promises.