The main purpose of a currency is to facilitate business transactions. It's main purpose is not a store of value over time.
When the currency doesn't grow as fast as the supply of goods over time it causes deflation and deflation causes depressions. On the gold standard we had major severe depressions every 20 years. Shortly after the creation of the FED, we had the great depression, which was caused when the FED tried to reign in the growth of the money supply and tightened to fast. The FED learned from that and we've not had a depression since.
The great recession which we are now in, wasn't caused by the FED, it was caused by stupid trade policies which off-shored too many of our jobs, deregulation of the banking industry, and the failure to adequately prepare for another oil price shock after the 70's.
What you want is a small amount of inflation each year. That avoids deflation and the risk of a deflationary depression. It also provides an incentive for people and businesses to invest cash, rather than to hoard cash.
In a deflationary environment, you can increase your purchasing power just by holding cash. You don't need to invest. And that's one of the reasons it causes depressions, is that people stop investing.
I know the 100 year charts of the value of a dollar looks scary. But the fact is that only hurts people who wanted to hoard their money in their mattress for 100 years. It doesn't hurt people who put it in a savings account and make some interest or who invest in business and earn much more.
If you look at the year to year swings of the value of the dollar, the dollar since the FED has had less than half the variablity of the dollar under the gold standard. Under the gold standard we had year to year swings in the value of the dollar sometimes in excess of 20%. And that is bad for business.
Post Hoc ergo propter hoc.
Just because prices fall in a depression does not mean that falling prices cause depressions. Falling prices can be caused by productivity improvements or caused by the result of underlying imbalances in the economy.
You seem to be advocating a purchasing power variant of the doctrine of underconsumptionism. We need more money to to bolster spending in the face of rising productivity. However, what underconsumptionists fail to realize is that no one demands a nominal amount of money, but rather a certain degree of purchasing power. Prices can fall in nominal terms, but the return can be a rising real one.
In fact, when you advocate the creation of money in the face of rising productivity, you fail to realize that the demand for loans is not the demand for money. The demand for loans is what can be purchased with those loans,i.e., capital goods or durable consumers' goods.
What makes you believe that businesses cannot adjust to falling prices as well as they adjust to rising prices? No businessman cares a wit for the "price level", but relative prices, viz., input vs output prices.
If input prices fall at the same rate, then businesses are not subject to losses. And if productivity improvements make input prices fall to a greater extent, then it benefits everyone.
The great recession which we are now in, wasn't caused by the FED, it was caused by stupid trade policies which off-shored too many of our jobs, deregulation of the banking industry, and the failure to adequately prepare for another oil price shock after the 70's.
How did trade policies cause a general depression in trade? How did it enable people to over leverage themselves?
How did trade policies cause bubbles in various commodities and a bubble in housing to boot?
How did trade policies cause capital markets to collapse before consumption goods markets?
If I understand you correctly, then the off shoring of jobs should hit consumers' goods industries first and to a greater extent. Those companies who save by using "slave-labor" should have rising equity values.
In a deflationary environment, you can increase your purchasing power just by holding cash. You don't need to invest. And that's one of the reasons it causes depressions, is that people stop investing.
Just out of the blue? Where do depressions come from?
Suppose every boom is caused by trade policy. If we are suffering because China has received our jobs and investment, then that fails to explain why they are busting as we speak. Why do they have declining equity values and a massive housing bust?
If you look at the year to year swings of the value of the dollar, the dollar since the FED has had less than half the variablity of the dollar under the gold standard. Under the gold standard we had year to year swings in the value of the dollar sometimes in excess of 20%. And that is bad for business.
That was a faulty interpretation of non-homogenous data.
The NBER‘s chronology has nonetheless been faulted for seriously exaggerating both the frequency and the duration of pre -Fed cycles and for thereb y exaggerating the Fed‘s contribution to economic stabili ty . According to Christina Romer (ibid., p. 575) , whereas the NBER‘s post -1927 cycle reference dates are derived using data in levels, those for before 1927 are based on detrended data. This difference alone, Romer notes , results in a systematic overstatement of both the frequency and the duration of early contractions compared to modern ones. 22
http://www.cato.org/sites/cato.org/files/pubs/pdf/WorkingPaper-2.pdf
I know the 100 year charts of the value of a dollar looks scary. But the fact is that only hurts people who wanted to hoard their money in their mattress for 100 years. It doesn't hurt people who put it in a savings account and make some interest or who invest in business and earn much more.
No one wants to do what you assert. Checking accounts and Savings deposit accounts are used (by and large) for a reason. There is a great risk keeping your savings at home(and the opportunity cost of not earning interest to boot).
And even if people began hoarding the purchasing power of money would adjust, and the real balance effect would kick in. People do no endlessly hoard, prices will fall and make real cash balances greater vis-a-vis items of purchase. What is wrong with individual choice? Protectionists always rail against the freedom of the individual to choose his own path.
The "small amount of inflation each year" is a de facto tax on those who do not get "injections" of cash from the Federal Reserver or its proxies.
The value of the dollar should rise and fall in the same manner as do other assets.
Everytime I read about the Fed's virtues, I am reminded of Ralph Waldo Emerson's famous quote.