The multiplier’s significance to monetary policy is, or used to be, straightforward: it indicated the quantity of additional bank deposits that monetary authorities could expect to see banks produce in response to any increment of new bank reserves supplied them by means of either open-market operations or direct central bank loans.
There is, after all, at least one impulse among humans that’s more deep-seated than their “propensity to truck, barter, and exchange.” I mean, of course, their propensity to let themselves be thoroughly bamboozled.
Government has been the cause of monetary disorder in our society. A free market in money and banking would be the solution to our “age of inflation.” Government central-planning of money has been tried and it has failed. It is now time for monetary freedom to be given a chance.
Free banking and monetary rules were rival ideas for guarding against abuses of discretionary monetary policy, today they are properly seen as complementary schemes, one for improving the performance of the banking system, the other for reforming the base-money regime.
On the Fed’s “instruments of monetary control,” which include devices for regulating the total quantity of bank reserves and circulating Federal Reserve notes, and also for regulating the quantity of bank deposits and other forms of privately-created money that will be supported by any given quantity of bank reserves.
A better alternative, if only it can somehow be achieved, or at least approximated, is a monetary system that adjusts the stock of money in response to changes in the demand for money balances, thereby reducing the need for changes in the general level of prices.
What sort of monetary policy or regime best avoids the costs of having too much or too little money?
How can a central bank manage a quantity without being certain just how to define, let alone measure, that quantity? How is it possible for the quantity of money supplied to differ from the quantity demanded? When those things do differ, how can one tell? Finally, just what does “the demand for money” mean?
What, exactly, is “monetary policy” about? Why is there such a thing at all? What should we want to accomplish by it — and what should we not try to accomplish?
The result of the Federal Reserve’s increase in the money supply, which pushes interest rates below that market-balancing point, is an emerging price inﬂation and an initial investment boom, both of which are unsustainable in the long run.
The CPI vs. the Diversity of Real People’s Choices
A central tool for governments to maintain their authority in society and their control over people’s lives is the ability to make the citizenry accept and use their monopoly medium of exchange.
Most people assume that prices move as a result of changes in the money supply. Instead, let’s look at the effect of changes in interest.
The real long-run goal of monetary reform should be the denationalization of money. That is, the separation of money from the state by ending of central banking, altogether. In its place would emerge private, competitive free banking – a truly market-based money and banking system.