Sorry I wasn't more clear the first time. The way you laid it out, with a fixed amount of money in circulation, then what you're saying is right.
What I meant is that whatever serves as money, be it metal coins, cigarettes or flower petals people are going to literally make money. They will find new sources of metal to coin, they will roll cigarettes, they will grow more flowers.
The point being that money is in the control of the people generally and not controlled by a cartel.
First off, something like 97% of the world’s money is virtual, so short of a total collapse of the world financial system, we’re never going to go back to using physical gold coins or cigarettes to conduct transactions. There are two main options, using coupons or using fiat money. All major western economies used to operate under the gold standard a century ago and then progressively transitioned to fiat money. The main reason for this was monetary independence, the gold standard needlessly tied countries’ monetary policies together and what happened in a foreign country could trigger a depression at home. A good example of this is when France started hoarding gold in the late ‘20s; I’ll quote from Douglas Irwin’s paper on the subject:
The gold standard was a key factor behind the Great Depression, but why did it produce such an intense worldwide deflation and associated economic contraction? While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33. The deflation could have been avoided if central banks had simply maintained their 1928 cover ratios.
For those interested, the entire paper can be found
here. (PDF warning)
Under fiat money, the value of a country’s currency is under its full control; which means that as long as the central bank remains independent and the people running it are competent, we shouldn’t worry about wild fluctuations in the rate of inflation. The central bank’s ability to stabilize the value of the currency is essential to promote economic growth. If you want to lend or borrow money for a period of 5 or 10 years, you don’t want to take the risk of the currency unexpectedly appreciating or depreciating.
Now that we’ve gotten all that out of the way, I can finally address your point. Why wouldn’t having separate private corporations issuing separate coupons for exchange be a good thing? Well, for a few reasons:
It would be hard to control counterfeit and fraud. There’s enough counterfeiting going on as it is right now with the full force of the law tracking those who do it, imagine how easy it would be to make fake bills in a word where there are 5 or 10 types of currencies and no central authority to verify their authenticity. You also have to account in the incentives the currency issuers have to cheat, instead of having our money being issued by a frequently audited governmental body who is appointed by our democratically elected government, we’d have our money being issued by corporations with no oversight. So unless you want an intrusive government regulatory system to control the currency issuers (which you probably don’t if you want this system), you always run the risk of a CEO printing a trillion Walmart dollars for his own salary.
There would be a major coordination problem between multiple currencies as most people don’t want to have multiple types of dollars and tens of credit cards in their wallets and retailers won’t want to have to use multiple prices, scanners and cash registers, etc. Having one currency has huge benefits due to economies of scale.
The value of a commodity backed currency can never be as stable as the value of centrally-managed fiat money because of potential external shocks. If I borrow $1000 worth of money for one year in gold-backed coupons and something like a terrorist attack or a mine collapse occurs, I might be forced to pay more back than I agreed to and as such will be less eager to make the deal. The biggest weakness of paper value is also its greatest strength; it has no intrinsic value, so we can always control its price.
You might also want to look at Jordan’s
amusing post for another good reason why competing currencies would be a silly idea.
So to finally answer your question, I assumed a fixed number of dollars in the economy because I wanted to isolate the issue to deflation and not have to deal with intricacies of decentralized money creation.
