The Postwar Monetary Regime and Its Inflationary Bias
Roosevelt's reforms established a new monetary regime based on credit-money. We have already discussed the modalities of this money-form in section 2.4. Here we analyze the broader implications of credit-money, especially its interaction with the other institutional forms of monopolistic regulation.
Most economists believe that we used commodity-money before the Great Depression forced its abolition. This widespread belief is erroneous. Other than agrarian forms of money during the earliest phases of human civilization, we have never really had commodity-money. All of our forms of money since then, including gold coins, have been tokens rather than commodities. What we did have, however, were monetary regimes rooted in commodity-money--the various metallic standards discussed in the last chapter (see also chapter 14 for more). This distinction is important. Using commodities as money gives rise to a barter economy and allows producers to create their own medium of exchange. Yet even during periods of a metallic standard we had a monetary economy, and the creation of money tokens has always been restricted to the banking system.
The monetary regimes preceding the Great Depression were all, with the exception of the Greenback Era of 1862-79 and World War I, based on some sort of metallic standard (see chapter 4). Over time this institutional form of money developed several shortcomings which led to its eventual collapse in the 1930s. For one, by limiting credit supply and money issue to previously accumulated specie reserves, it constituted a "metallic barrier" to continuous and stable capacity expansion. Of course, under the aforementioned system of "fractional reserve banking," banks could issue socially accepted money tokens (e.g., bank notes, demand deposits) beyond available specie reserves to finance strong credit