"The theory of elasticity is correct. Banks increase and decrease their circulation pari passu with the variations in the demand for money. In doing so, they help stabilise the objective exchange value of money."
History knows many periods where an inelastic money supply led to an economic decline, unemployment, economic hardship and poverty. Here is a clip from "The Miracle of Wörgl" ("Schillings from Heaven") which illustrates the workings of an easticity currency supply.
The Miracle of Wörgl (1931 to 1932)
Town mayor Unterguggenberger explains monetary elasticity to the town council: A German tourist and his self-liquidating 100 Schillings.
Wörgl's approach was quite sound in one key design element, it monetised overdue, not future taxes. It was problematic in another aspect, as a 'Schwundgeld' according to Silvio Gesell. Every month the holders of currency had to buy a stamp or their bill would become invalid. Gesell's idea was to keep money circulating and to forestall harmful hoarding. Accordingly, Wörgl tainted the benefit of an elastic money supply with a inflationary element. Bitcredit Protocol prevents the hording problem without inflation, as credit money automatically redeems into outright Bitcoin at maturity.
The Great Bullion Famine (1457 to 1464)
A lack of metallic coin caused hunger and hardship throughout medieval Europe for a whole generation, as elastic currency was not yet invented. "The chief effect was that business slowed down: Everything shrinks. When there’s a shortage of coin, there’s a shortage of credit. The possibility of doing things vanishes — you would expect credit to increase but in fact it diminishes because people aren’t prepared to loan money if they are not certain they are going to be paid in the long run. You have a bit of a return to barter and people not being able to sell things as trade diminishes.”
The Peel Act Consequences (1844 to 1847)
After the crisis of 1825 people recognised that commercial banks could over-issue bank notes, causing inflation and stock price bubbles. Excessive credit expansion cannot continue indefinitely, ultimately the weakest bank will fail and cause a cascade of further failures which is exactly what happened. However, monetary theory was unsound, the crisis was attributed to banknote over-issuance instead of the true culprit, credit expansion for speculative purposes.
A the Peel Act 1844 blanket abolished all monetary elasticity in favour of 100% gold reserve, proverbially throwing out the babe with the bathwater. This resulted in monetary rigidity and thus liquidity crisis in periods with high currency demand. Under stress, investment collapsed and credit contracted which caused a severe recession. The crisis was resolved by re-introducing elasticity: the suspension of the act during stress, and the issuance of extra notes mostly against real bills of exchange.
The Great Depression (1929 to 1939)
Coming soon.