Transformational Growth and Full Employment
Edited by Edward J. Nell and Mathew Forstater
Chapter 12: Anchors Aweigh: From Real to Nominal Money and from Market to Government Stabilization
Edward J. Nell The traditional monetary system was ÔanchoredÕ in precious metal. In the earlier forms of the system, the metal was mined and minted into coins until sufficient coins were in circulation for exchange against current goods and services. This proved to be expensive, so paper came to be substituted. But the value of the paper depended on that of the coins. That is, the value of the monetary unit was tied to the value of metal through the fact that the circulating medium could be converted into metal. This prevented ÔoverissueÕ of the paper currency, the correct issue being the amount needed to replace metal where that amount is determined by the needs of circulation. Since prices were subject to a constraint, it was difficult for inflation to take root. But because the money supply depended on reserves, which had to be earned or obtained in the market, the system tended to be inflexible. For instance, it could not easily adapt to changing levels of activity. It also faced problems in raising the large sums of money needed for the construction of networks necessary for collective goods and services Ð classically, railroads, but later, telephones, radio, and television, not to mention highways. To reap the advantages of scale, these had to be built ahead of demand, amortized over long periods. Nor could the state issue money without backing, thus making it difficult for government to fulfill its new roles. In the interest of flexibility, the anchor has been weighed;...
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