Monetary elasticity

History knows many periods in which an inelastic money supply led to economic decline, unemployment, hardship, and poverty. Three episodes show what happens when the currency supply cannot follow the demand for money, and what happens when elasticity is restored.

The miracle of Wörgl

1931–1932 · AUSTRIA

Town mayor Unterguggenberger explained monetary elasticity to his council with a German tourist and his self-liquidating 100 schillings. The clip “Schillings from Heaven” shows the mechanism at work: watch the scene →

Wörgl was sound in one key design element: it monetised overdue taxes, not future ones. It was problematic in another: as a Schwundgeld after Silvio Gesell, holders had to buy a stamp every month or their note became invalid. Gesell’s aim was to keep money circulating and forestall harmful hoarding, but it tainted the benefit of an elastic supply with an inflationary element.

Bitcredit prevents the hoarding problem without inflation: credit money automatically redeems into outright bitcoin at maturity.

The great bullion famine

1457–1464 · MEDIEVAL EUROPE

A lack of metallic coin caused hunger and hardship across medieval Europe for a whole generation, because elastic currency had not yet been invented. Business slowed everywhere: “When there’s a shortage of coin, there’s a shortage of credit.” Lenders would not commit if they could not be certain of being paid, so trade shrank back towards barter.

The Peel Act consequences

1844–1847 · BRITAIN

After the crisis of 1825 it was recognised that commercial banks could over-issue banknotes, causing inflation and stock price bubbles. Excessive credit expansion cannot continue indefinitely: ultimately the weakest bank fails and triggers a cascade of further failures, which is exactly what happened. But monetary theory was unsound, and the crisis was attributed to banknote over-issuance instead of the true culprit: credit expansion for speculative purposes.

The Peel Act of 1844 then abolished monetary elasticity wholesale in favour of a 100% gold reserve, proverbially throwing out the baby with the bathwater. The result was rigidity, and therefore liquidity crises in periods of high currency demand. Under stress, investment collapsed and credit contracted, causing a severe recession. The crisis was resolved by re-introducing elasticity: suspending the act during stress and issuing extra notes, mostly against real bills of exchange.

The Great Depression

1929–1939 · GLOBAL

COMING SOON