It is widely held that a growing economy requires a growing money supply, because economic growth gives rise to a greater demand for money. It is also believed that failing to accommodate the increase in the demand for money, will lead to a decline in the prices of goods and services. This, in turn, could destabilize the economy and produce an economic recession or depression.

Some economists who are the followers of Milton Friedman—also known as monetarists—want the central bank to “target” the money supply growth rate to a fixed percentage. They hold that if this percentage is maintained over a prolonged period it will usher in an era of economic stability.

The idea that money must grow in order to support economic growth gives the impression that money itself somehow sustains economic activity. However, money’s main job is simply to fulfill the role of the medium of exchange. Money does not sustain economic activity. Historically, many different goods have been used as the medium of exchange. On this, Mises observed that, over time,

…there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained, which was universally employed as a medium of exchange; in a word, money. …

By demand for money, what we really mean is the demand for money’s purchasing power. After all, individuals do not want a greater amount of money in their pockets. What they want is a greater purchasing power in their possession in order to exchange for goods now or in the future.

In a free market, in similarity to other goods, the price of money is determined by supply and demand. If there is a decline in the amount of money, all other things being equal, its exchange value will increase. Conversely, the exchange value will decline when there is an increase in the amount of money, all other things being equal. Within a free market, there cannot be such a thing as “too little” or “too much” money. As long as the market is allowed to clear, no shortage or surplus of money can emerge. …

Even Milton Friedman’s scheme to fix the money growth rate at a given percentage will not do the trick. After all, a fixed percentage growth is still money growth, which leads to the exchange of nothing for something (i.e., economic impoverishment and the boom-bust cycles).

What about keeping the current stock of paper money unchanged? Would that do the trick? An unchanged money stock would cause an almost immediate breakdown of the present monetary system. After all, the present system survives because the central bank—by means of monetary injections—prevents the fractional reserve banks from going bankrupt. Therefore, it is not surprising that the central bank must always resort to large monetary injections when there is a threat from various political and economic shocks. How long the central bank can keep the present system going is dependent on genuine production and saving within an economy which happens alongside artificial growth. Central bankers may also realize that this process has brought about price inflation and—if they keep printing—it could eventually destroy the monetary system. After a certain point, no amount of monetary inflation will prevent the implosion of the system.