“Management of the Money Supply is More Sensible than Linking it to Gold…”

Right, I’m doing a bit of research on fractional reserve banking. So I pulled up my old “Macro-Economics” textbook from my days at college some 21 years ago. The 12th edition of the book, written by McConnell and Brue, was published in 1993. In a section titled “money as debt” they write:

Most economists feel that management of the money supply is more sensible than linking it to gold or any other commodity whose supply might arbitrarily and capriciously change. A large increase in the nation’s gold stock as the result of new gold discovery or a breakthrough in the extraction of gold from ore might increase the money supply far beyond the amount needed the transact a full-employment level of business activity, and therefore cause inflation.

First of all, any amount of money will do in an economy. There is no such thing as “too little” or “too much” money as prices will just adjust accordingly (as long as the money is easily divisible). But what I found really amusing was their statement that “…management of the money supply is more sensible than linking it to gold or any other commodity whose supply might arbitrarily and capriciously change”, i.e. they’re advocating money not backed by anything. Well, here’s what happened to the U.S. money supply since 1993:

How is that for an “arbitrarily and capriciously change”. Since 1993, the U.S. money supply has increased, on average, by more than 7.2% every single year. I did a quick search, but was not able to find anything useful on the quantity of gold. But I do believe I have read somewhere that the world gold supply typically increases some 0.5% to 1.0% annually. But I’m very confident the gold supply hasn’t increased anywhere near the some 360% total increase in the money supply during the last 21 years. How wrong McConnell and Brue were. I sincerely hope they have changed their views in the most recent, and 19th, edition of the book.

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