[jteppinette]

> it is extremely clear to me that some kind of control of the money supply is necessary, otherwise you get depressions

I disagree, and I will attempt to explain myself clearly.

Artificially modifying the money supply or interest rates (cost of money) breaks the market’s ability to self-regulate. Artificially low interest rates and money creation leads to an artificial boom period. This pushes investment into areas where it would otherwise not be directed (consumer goods vs producer goods / generally bad investments i.e. subprime mortgages, risky tech, etc..). This eventually results in a bust period as the system realizes its mistakes.

The real problem is the creation of an artificial boom, the bust is just a natural reaction to that boom.

[freddybobs]

> "the market’s ability to self-regulate"

The market is artificial. For an example it it operates (largely) within constraints that are external - laws.

Modifying the money supply is a lever that can be used to achieve goals - such as a desired inflation rate.

Whether its a good idea or when and how is the appropriate way to use it is another question. Implying it is bad because it is "artificial" begs the question of what's "natural". The market is clearly not natural.

[scottiebarnes]

> The market is clearly not natural.

OP probably meant "more free-market / laissez faire" vs "less free-market / centrally planned".

[jteppinette]

When discussing price, supply and demand is a natural way to reach the most efficient answer. Alternatively, price fixing, results in market failure.

[orwin]

This isn't really true in the real world, but even if it were, here GP is talking about limiting supply and not price fixing.

[doubleunplussed]

The business cycle is a natural phenomenon that predates central banks controlling the money supply, and would still occur if there was a fixed monetary base.

As banks loaned more and less, and people spent faster and slower through the business cycle, the total amount of bank money and the velocity it was spent at would grow and contract. Prices would therefore be unstable, because prices follow changes in the money supply and the velocity of money. Money would become scarce, and thus interest rates high, right when central banks would be cutting rates. The business cycle is self-reinforcing, there's no natural equilibrium to it at all, and if not smoothed by a government or central bank, can result in tragedies like the great depression.

And in a world where economies are still growing, without growth in the monetary base we would in the long run have deflation, which most economists think is worse than small positive inflation.

[jteppinette]

First, the money supply and price of money has been manipulated since before central banks existed.

I don’t exactly understand your thesis, because, of course the federal reserve existing more than a decade before the Great Depression and is a primary driver for the credit expansion that caused the Great Depression to be so large and long lasting. Artificial manipulation, as I described above, is what causes the natural movements of an economy to be so extreme.

[cykros]

While I don't think I want to delve too into the matter, arguably, the Federal Reserve NOT holding more control over the amount of money flooding into the system through repeated rehypothecation of securities as the roaring 20s saw banks and brokerages happy to loan out more and more money had a lot to do with its occurrence in the first place. Prior to the Securities Act of 1933, and later Regulations T, U, and X (https://en.wikipedia.org/wiki/Regulation_T), brokerages and banks had a lot more leeway in determining their own reserves. Which ultimately, particularly in a booming securities market, means that they were largely unregulated when it came to raising the total amount of money in circulation at least in nominal terms. The aforementioned regulations took great strides in curtailing this excessive power and brought margin rates and reserve requirements under the domain of the Federal Reserve as tools for manipulating the cost and flow of money toward serving their dual mandate.

If there is a particular institution that is exacerbating the peaks and troughs of the business cycle, it is credit itself. Going back a few centuries, in Europe anyway, the usury laws used to forbid (Christians anyway) from lending money at interest, being seen as effectively a form of theft (think of laws limiting loan sharks now). The business cycle is tied right back to the credit cycle (to the extent that the words are used almost interchangeably), and if you remove the existence of credit, you remove much of the boom and bust cycle that goes with it. This said, it's worth determining if this is REALLY what you want, as prior to the availability of credit, the ability to start businesses and innovate was significantly reduced, and generally, only available to the particularly wealthy.

Central banking was just a means of trying to bring some order to the chaos that all of this credit flowing around was having. Sometimes it seems to work well; other times, it feels like the cure may be worse than the disease. Either way, it's worth knowing about the beast its there to attempt to cage.