[...the supply of money is indifferent or "neutral" to the real processes of the economy. But, unfortunately, changes in the supply of money can have untoward and even devastating effects on the real processes of production.]
The Federal Reserve System is a central bank created to manage our currency. It's creation was supposed to be for our benefit, among its roles is one to ensure that cash can be obtained by banks to satisfy demands for cash from a bank's depositors. It was conceived as a way to "help" the free market operate.
Its very presence offered a new tool of influence by our government on the economy of the nation. It enables the government to change the supply of money within the economy. While this was possible even under a money made of and/or backed by gold (and silver) coin, the final disconnection of our US dollar from such intuitively limited and scarce commodities as precious metals finally allowed our government to control the supply of money with full, unrestrained freedom.
In a free and unfettered market (one in which regulation may either not exist, or exist only to facilitate exchange, enforce lawful agreements and protect property) grounded on hard money (such as gold coin), the money substitutes we enjoy for convenience (electronic bank card transactions, paper checking, paper banknotes) self-regulate and attain a stable equilibrium and purchasing power (or value) with respect to their backing.
Market forces beneficially conspire to keep participants and banks from magically creating too much credit. If people begin to feel that their checking deposits and private banknotes on a bank are going to be difficult to redeem for real, hard money, such individuals will act quickly to compel redemption. A bank run may ensue as rumor spreads, in the aftermath of which the bank will be found to be solvent and trustworthy, or it will be found a fraud and its assets seized upon by depositors and quickly liquidated, thus rapidly removing fraud.
In such an environment, it becomes very difficult to change the money supply. Only the convenient substitutes can be manipulated, and then only to the extent that a wary public is willing to trust their financial institutions to conduct business honestly.
With a stable money supply, the value of money is likewise stable. Inflation vanishes permanently (to be rigorous, inflation would only occur to the extent by which new supplies of the underlying hard money commodity, i.e. gold, could be mined, and even then, only a finite amount of the metal exists, whether in accessible bullion, coin, or inaccessible in minuscule ore deposits). To the extent by which technology and population available increase supplies of goods and services and productivity by which they're produced, a natural and gentle deflation persists!
We've been taught in the mainstream to believe that both inflation and deflation are bad things. What's bad is manipulation of the money supply! In the aggregate of the whole economy, with a fixed and unchanging money supply, modest deflation represents increases in efficiency and productivity with respect to production. The value of your dollar would be increasing. You savings, whether in a bank or under a matress, would still reflect the real value of our work when saved, and an appreciation of the increase in bounty that better productivity has afforded.
Rather than tales to your grandchildren of a can of Coca-Cola costing $0.75, and they being in awe of how cheap that price level seems to them in the present, they could instead be in awe of what it says about our economic fitness and vibrancy that Coca-Cola is now less expensive at, say, $0.40.
New young employees entering into the workforce to do your job would be hired at lower wage rate in dollar terms, but those dollars would be stronger and represent an increased purchasing power to what they had when you started.
Arguments for central-banking and its supposed necessary roles of fostering price-level stability and lender of last resort to banks are all nonsense. If a money supply is fixed and an economy growing, that growth will be manifest to the extent to which natural deflation is occurring. An economy that's stagnant will have a naturally stable price-level. And one which is shrinking will see inflation.
The Keynesian model views an economy and seeks to maintain an economy in a fixed state. Even if that could work, which it cannot and does not, a fixed economy would represent the end of human growth and achievement. We would have thus reached the limits of our abilities and from that point on, any improvement in any one area would have to be paid for by effacement in one or more other areas. Nobody could become rich without making others poor.
It's that last part to which Keynesians play for your political support. Every gain is another's loss.
But this isn't true. You participate and buy what you want to satify your own needs and desires. You're happy to make the trade because, to you in that moment, it represents a better alternative than remaining as you were. Maybe that was a new, more comfortable pair of shoes. Maybe that was at last a satiation of long endured hunger. Whatever the circumstance, you benefitted. In the end you may be compelled to work to earn money to facilitate similar exchanges. You want to work (even though there is a possibility you might not "like" your work), because the alternative is less appealing. Perhaps you striven and sacrificed and succeeded finally in finding work you absolutely love. Congratulations! And still this truth holds, you want to work because the alternative is less appealing. In so doing, whether you're enjoying your work or not, you're providing others with the things they want, and enabling yourself to acquire what you want in exchange.
Keynesianism, in the final analysis, is only a mechanism facilitating a race to live at the expense of, rather than in support of, others. You become dis-incentivized to support your fellow man because some or all of your wealth will now be given to you without any contribution on your part. Or, from the opposite end, some of the wealth derived from your work (which supports others) is now confiscated to support still others without your consent. You're deprived of the benefit your work earned. The harder you work the more you're deprived of those added benefits, so your incentive is suddenly to work less.
Both the wealthy and poor are similarly incentivized to work less. Now we all become poorer, because as a result of less work, there will be less stuff available. The best Keynesianism can hope for is stagnation, but more often you'll see recession and a growth industry in misery.
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