Is there an orthodox impossibility about money creation ?

Steve has explained the curious situation that’s apparently arisen in orthodox economics, where little or no attention at all is paid to how money is created. It is seemingly said to simply exist, in an essentially fixed or very slowly changing amount.

Perhaps it’s possible to see where this rigid view - incorrect applied to modern money - comes from. It strikes me that these folk are treating the creation of money as impossible. They seem to see money as strictly commodity-based in form. Coins can be minted and notes printed as tokens of an existing stock of money, but no more of that stock can be created. Money, or rather the commodity that’s the basis of money, cannot be created only found, already existing in Nature as a finite stock. In this view, to say otherwise would be to violate the laws of physics and believe in magical transubstantiation, perhaps?

Printing and minting are therefore risky activities, doomed to inflate the value of such tokens. For a government to spend more than it taxes and avoid inflation, it perforce must borrow. Such a view seems to reframe the meaning of the word ‘fiat’ to refer to the easy process of creating the tokens without necessarily undertaking the difficult, slow and haphazard process of finding more money in Nature, that would match those tokens.

This view might also explain why these folk seem to think that banks can’t create money, because they’re not in the business of looking for the stuff in Nature. Oh, the long, long (and deep) shadow of commodity money - found not created …

2 comments