There is a certain proportionate quantity of money requisite to carry on the trade of a country freely and currently; more than which would be of no advantage in trade, and less, if much less, exceedingly detrimental to it.

— Benjamin Franklin, The Nature and Necessity of a Paper Currency, 172915

After the Great Depression, when President Franklin D. Roosevelt took office in 1933, one quarter of the US workforce was unemployed. A story circulated to support the value of a government initiated stimulus. The story still drifts around the Internet.

In the small town of Podunk nearly everyone was out of work and in debt. One day a stranger came into town and stopped at the lone hotel. He set a $100 bill on the counter and told the innkeeper he’d like to look at the rooms before deciding whether he wanted to stay. The Inn was empty and the rooms were unlocked, so the innkeeper said, “Please, feel free to explore our rooms upstairs, I have some business I must attend.”

The man went up to the second floor to look at the rooms. The innkeeper grabbed the $100 bill and ran with it to the butcher and paid his overdue balance. The butcher took it and ran to the grocer to pay his bill. The grocer took it and ran to the farmer to pay his bill. The farmer took it and ran to pay the prostitute he’d been seeing on credit. She took the bill and ran to pay off the innkeeper for her use of his rooms. She had just slapped the $100 bill back down on the counter paying off her debt, when the stranger descended. He said he had decided he would not stay. Pulling some matches and a cigar out of his pocket, he lit the $100 bill and then his cigar, saying with a wink, “It’s just a gag gift from a friend.”

This story illustrates how a money token can be anything people agree to use, and how an infusion of money can stimulate economic activity. When there is the right amount of money, communities prosper. When there is not enough or too much, some people suffer, and some people make out like bandits. In between the creation of money and its destruction, it circulates. How much money is the right amount is determined by how fast and how far it circulates. And that is a product of the goods and services available and the corresponding buyers who want those goods and services.

Quantity and value are relational

How much money is circulating matters. The law of supply and demand applies to money itself; the greater the money supply in proportion to the exchanges people want to make, the less each unit of money is worth. When the value of a unit goes down, prices go up, and it takes more units to buy the same item. When there is less money in proportion, each unit of money is worth more and prices go down.

Quantity affects the quality and speed of transactions

The amount of money – in proportion to the number of people and potential exchanges – determines the number and the quality of the exchanges that are made. When money in an economy is abundant, people buy and sell more. Money circulates faster, generating more economic activity. People prosper, and they are more likely to have money available for investing in new technologies.

We have seen booms in innovative technologies when the money supply grew in proportion to the existing goods and services. These flourishing times go back to the beginning of recorded history and the initial invention of money itself in Mesopotamia. Periods of technological and cultural flowering happened after China’s invention of paper money in about 900 AD, after the Italian Medici family’s implementation of double entry bookkeeping in the 14th century, and after the influx of gold and silver from South America into Europe in the 16th century. Dramatic expansion of the money supply propelled the Renaissance, the European expansion into the Americas, the industrial revolution, and the current development of modern technologies. However, keep in mind these developments were not universally good for everyone, as the money systems in place led to genocide (e.g., the 16th century pillage of the Aztec kingdom for gold), extremes of wealth and poverty, and the consumption of finite natural resources. It is important to note we can have these benefits of innovation and survive, if we choose a money system that supports both values.

When there is less money in proportion to the number of people and potential exchanges, we say money is tight. Economic activity is slower; people can barely afford the necessities. Loans are difficult to acquire and economic activity stagnates. Individuals, businesses and governments make drastic cutbacks, sometimes causing harm that can last decades and lifetimes. The wealthy can then take advantage of a stagnant economy by converting their money stash into hard assets at rock bottom prices. With fewer buyers and more valuable money, prices slowly drop, which eventually brings people back to spending again, fueling an expansion-contraction cycle that, like a pump, shifts wealth from most people to a few.


How fast money moves around has an impact on how much money is the right amount of money. After money is created it moves around in an economy, used by many people in chains of transactions. Depending on the system, a money token can circulate for a short time or an infinite time before being extinguished. If a significant number of people, or a small number of people with enormous wealth, stop spending and instead hang onto their money, then the amount of money in circulation will drop, and the unit value will go up. Some money systems have built in a deliberate drop in the value of money to encourage people to spend it and keep it circulating. There is a balancing point, where the amount of money circulates freely with a modicum of saving that maintains a consistent value of money.

Entry point

How new money enters the economy matters, because the how will decide the where and the where will determine velocity and accessibility. If new money goes directly to citizens, nearly all of it will be spent and circulate, increasing the amount of money in circulation and spurring general economic activity. If new money goes to businesses outside the financial sector that use the money for capital improvements or purchases of new equipment, or to pay their employees, the money will circulate and add to the money supply. If new money goes to banks to shore up poor balance sheets, then it will not increase the money in circulation. If money goes to a wealthy few who will use it for gaming in the financial sector and for buying control over crucial global commodity supplies, it will not touch down on Main Street. The latter two are what usually happens in the US and explains why most people have not seen much recovery since the last meltdown in 2008.

Recent History

Too much

If Goldilocks stepped into our economy in early 2007 (or early 2018), she would have found a nation with too much money. She would have found some prices had been jumping up by over 10 percent annually for several years. The average price of new homes in the US increased by 70 percent in the ten years from 1997 to 2007 according the Census Bureau.16 Banks were using software to calculate mortgage risks that did not include the possibility of falling prices. People were giddy about home buying and loans were so easy to get, you didn’t need any paperwork documenting your income for many loans. Banks were practically begging folks to borrow against their home. Where did all the money come from?

We currently have a system in which the money supply grows every time a bank issues a loan. The banks were giddily issuing mortgage loans and an overabundance of money pushed the price of homes up further and further, fueling an asset bubble. Interest rates were so low, it felt like free money! Since the value of your home was going up so fast, you were really just taking out some equity, they said in their loan pitch. People took out this equity and most of the increases in spending in the decade from 1996 to 2006, described as our booming economy, were a result of this borrowing, not the creation of new jobs, innovation or increases in productivity.

When we have too much money in proportion to the products and services in an economy, the value of each unit of money goes down and prices go up. This is what happened in the decade preceding the 2007 crash. This is called inflation because the supply of money is inflated – think of an expanding balloon as a metaphor – and because the price of goods and services go up. When price inflation is exuberant it is called a bubble. Almost any time the price of an asset class is growing rapidly, you know bankers are on the loose.

Too little

If Goldilocks stepped into our economy in 2009, she would have found a nation with too little money available to Main Street. Banks cut back the credit lines of businesses and individuals, under government requirements that they only issue sound loans – standard practice in a healthy economy. Businesses closed and people were out of work. With fewer working, tax collections dropped and government at every level had less to spend. Critical services were cut back, putting more people out of work. Individuals, businesses, and cities sold off their assets for less than their worth just to survive. Those who had accumulated wealth and/or had the power to create or borrow new money snapped up the deals. It was a massive shift of wealth from individuals and the common wealth to a few extraordinarily privileged and wealthy people.

Where did all the money go on Main Street? It was extinguished when loans were repaid, and new loans were not issued to make up the difference. While most people were scrimping and hurting, the transfer of wealth from Main Street working folks to Wall Street manipulators was on the fast track. Between 2007–2011 – the most difficult years of the recent depression – the central Federal Reserve bank (Fed) loaned the big banks and financial players over $16.1 trillion which they used to buy stocks, bonds, municipal properties and revenue streams, commodity sources, and entire communities of housing.17 That’s ‘T’ for TRILLION, more than the entire volume of economic activity in the nation in the year 2011 when the Gross Domestic Product (GDP) was $15,319.18 More on this wealth transfer machine in Chapter 6.65–6.72.

When we have too little money in proportion to the products and

services in an economy, the value of the money goes up – it takes less money to buy goods and services. This is called deflation, because the supply of money is deflated and the prices go DOWN.

Just right

So, what does it look like when we have just the right amount of money in the economy? That depends on the system and the values.

If you value privilege for the wealthy, then the right amount of money is a supply that increases at a faster rate than population and productivity. This over-creation of money reduces its value over time, and a wealthy few will be best able to take advantage of newly issued money at its highest value, and this steady reduction in its value. Money that will be worth less next week motivates people to borrow and spend today rather than save for tomorrow. This increase in spending benefits those who issue loans and, short-term, it benefits the owners of businesses (who see an increase in business). However, a system that overall privileges the wealthy few, shifts wealth into their hands and creates hardship and scarcity for everyone else (Chapter 6). In a decreasing value money system, the right amount of money is enough to cause a slow and steady drop in its value.

Diminishing value money is the deliberate choice of most money systems globally: a steady devaluation of the money at about 1–3 percent is considered optimum, though most of the countries choosing steady devaluation have been running in the 5–8 percent devaluation range for the past century – and simply changing the way they measure devaluation to push the numbers into their sweet spot. In the US, our Federal Reserve System declares 2 percent devaluation of the dollar to be optimum.19

If you value an equitable system that privileges no one, then the right amount of money is an amount that keeps the value of money stable over time, so changes in price truly reflect market supply and demand, added value, or the impact of innovation. Money with a stable value privileges no one, and gives no one undue influence over the marketplace.

So, how do we arrive at the right amount of money?

What criteria could we use to determine how much money is right?

What do we value?

First we must ask, what do we value and will those values be preserved in our choices?

Our values will determine whether we want money with an elastic value that privileges some and punishes others. Some people believe that people of wealth – people with capital – should be privileged, and if we want to give special privileges to those of great wealth, we must pick a money system that supports this value – and, up until now, that is exactly what we have done.

However, our US Constitution establishes “all men are created equal,” which means no one should have special privilege under the law. A practical expression of this value would be a stable value money system that shifts the choice of winners and losers in the economy to the open marketplace. Our Constitutional values and our money system choice are currently out of alignment.

Here are some basic considerations.


Assume one has the right amount of money to begin. If one wants to keep prices stable and remove the benefits and burdens of changes in the money supply, then as a population increases, there will need to be more money to keep the supply in proportion to the number of people using it.


We didn’t need to budget for a car in horse and buggy days…or budget for a cell phone when the only way to communicate was by post. As we innovate, people need more money in circulation to pay for improvements to our lifestyles and standard of living.


Innovation requires mistakes, and mistakes can mean waste. We need some slop in the money supply, so innovators have access to money to blow on the mistakes that lead to breakthrough technologies.


When a hurricane hits and destroys billions of dollars in assets, it may be necessary to increase the money supply to afford rebuilding and repairs.


In general, this section addressed the right amount of money for a mono-money – a single national money system. Later, we’ll examine evidence showing a secondary money system, or a variety of complementary systems, lends strength to an economy. More about this in Chapter 4.38.

The Choice

So, IF, one wants a fixed measuring stick money system and an equitable playing field economy, then when new money is created and moved into the economy it must represent increases in the population and/or increases in productivity and value created, with a pinch for mistakes along the way to innovation, and a pinch to manage disasters.

If one wants a system that privileges some and not others, then choosing an elastic measure money system is the right choice. The same considerations apply; we create either too much money or too little money so supply and demand will alter money’s value.

 PrevMoney Fundamentals 3.24