The Elasticity Problem

“A stable price level and a high and stable level of employment do not require or permit the total quantity of money to be kept constant or to change at a constant rate. [...] The supply of money must possess considerable elasticity.”

F.A. Hayek: The Denationalisation of Money (1974)

History knows many events where an inelastic money supply led to an economic decline and human hardship and how adding an elastic money supply relieved unemployment and poverty. Here is a clip from "The Miracle of Wörgl (English title "Schillings from Heaven") which illustrates elasticity.  

The Miracle of Wörgl (1931 to 1932)

Town mayor Unterguggenberger explains monetary elasticity to the town council: currency comes into circulation through a German tourist and self-liquidates out of existence when he leaves. 

Wörgl's approach was part correct, part problematic as it was a "Schwundgeld" according to Silvio Gesell. Every month the people of Wörgl had to buy a stamp or it would become invalid. Gesell's idea was to keep money circulating, no hodling. Bitcredit has no re-circulation problem, it automatically redeems into Bitcoin at maturity. 

The Great Depression (1929 to 1939)

The Great Bullion Famine (1457 to 1464)

A lack of metallic coin caused hunger and hardship throughout medieval Europe for a whole generation, as elastic currency was not yet invented. "The chief effect was that business slowed down: Everything shrinks. When there’s a shortage of coin, there’s a shortage of credit. The possibility of doing things vanishes — you would expect credit to increase but in fact it diminishes because people aren’t prepared to loan money if they are not certain they are going to be paid in the long run. You have a bit of a return to barter and people not being able to sell things as trade diminishes.” 

The Peel Act Consequences (1844 to 1847)

A new law abolished monetary elasticity in favour of 100% gold reserve which brought the UK economy down so fast that the regulation was revoked only three years later.

Read on: Reserves