How Central Banks Destroy Money’s Purchasing Power

by Frank Shostak

Most economists hold that a growing economy requires a growing money stock on grounds that growth gives rise to a greater demand for money that must be accommodated. Failing to do so, it is maintained, will lead to a decline in the prices of goods and services, which in turn will destabilize the economy and lead to an economic recession, or even worse, depression.

Since growth in money supply is of such importance, it is not surprising that economists are continuously searching for the optimum growth rate in money supply. For instance, followers of Milton Friedman—also known as monetarists—want the central bank to target the money supply at a fixed percentage. They hold that if this percentage is maintained over a prolonged period, it will usher in an era of economic stability.

The whole idea that money must grow in order to sustain economic growth gives the impression that money somehow sustains economic activity. If this were the case, most Third World economies by now would have eliminated poverty by printing large quantities of money.

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