My thesis on flexible money supply

This is the first of what I plan to be a series about the money market and modern banking. It is with the intention of taking a serious, nuanced look at this question: Could a fixed-supply currency possibly work in the modern economy?

There is this fundamental thing about business from Stigum’s Money Market:

I have an inkling, a tickle, of the following thesis. And I think the above selection is an underlying, perhaps essential quality of the world that drives my thesis: flexibility of money supply is the single most important quality of modern currency. That is, the ability for the money supply to rise to meet current demand for capital expenditures is a necessary one to maximize economic growth.

When I think about this, I imagine everyone, collectively borrowing from the future. I could picture someone working for free today, with a promise to be paid next year.

Of course, this quality of money does not mean that we actually get labor or products of production from the future. Also, you might be tempted to say: So what? Businesses borrow money to fund capital expenditures or to get off the ground, and that has nothing to do with a fixed or flexible supply of money.

But, no. The above quote from Stigum is talking about all the businesses in the economy. If they all want to borrow at the same time, what they are doing is paying for today’s investment with next year’s growth. And only a flexible supply of money can accommodate that.

More to come.