Munich Personal RePEc Archive

Unrestrained Credit In A Credit Economy, The Credit Cycle, And Fiat Money Defy Monetarism In The Attempt to Control Price Level Changes

Salvary, Stanley C. W. (2008): Unrestrained Credit In A Credit Economy, The Credit Cycle, And Fiat Money Defy Monetarism In The Attempt to Control Price Level Changes.

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Abstract

Monetarists maintain that changes in the price level are attributable to the level of the money supply. Hence, price stability has been the rationale for the money supply rule derived from the Quantity Theory of Money. Consequently, to curb inflation, the general price level index is the lever for periodic adjustments of the short-term interest rate. Nevertheless, monetary control is ineffective due the fact that: (1) with the collapse of the gold standard during the 1930s and the removal of the final link to a commodity - gold (an exogenous variable with a variable nominal value), fiat money (an endogenous variable with an invariable nominal value) emerged unchallenged; (2) the realignment of relative prices - the perennial cause of changes in the general level of prices - cannot be abated since it is the effective mechanism for the efficient functioning of the economic system; and (3) unrestrained consumer credit - driven by unbridled aggressive business policies and producing documented credit cycles with periods of credit expansion and credit saturation - has severely amplified the impact of price level changes. This paper examines the issue of price level changes within the context of money (types and functions), economic systems (barter, monetary, and credit), aggressive business practices, unrestrained consumer credit, and credit cycles.

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