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Chapter IV The Supply of Money

To understand chronic inflation and, in general, to learn what determines prices and why they change,

we must now focus on the behavior of the two basic causal factors: the supply of and the demand for money.

The supply of money is the total number of currency units in the economy. Originally, when each

currency unit was defined strictly as a certain weight of gold or silver, the name and the weight were simply

interchangeable. Thus, if there are $100 billion in the economy, and the dollar is defined as 1/20 of a gold

ounce, then M can be equally considered to be $100 billion or 5 billion gold ounces. As monetary standards

became lightened and debased by governments, however, the money supply increased as the same number of

gold ounces were represented by an increased supply of francs, marks or dollars.

Debasement was a relatively slow process. Kings could not easily have explained continuous changes

in their solemnly defined standards. Traditionally, a new king ordered a recoinage with his own likeness

stamped on the coins and, in the process, [p. 44] often redefined the unit so as to divert some much needed

revenue into his own coffers. But this variety of increased money supply did not usually occur more than once

in a generation. Since paper currency did not yet exist, kings had to be content with debasement and its hidden

taxation of their subjects.