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With the money supply thus varying in accordance with the state of the balance of payments, currency overissue would be totally suppressed and domestic prices would vary in lockstep with world prices.
An influential group of classicals known as the strict bullionists arose to attribute these inflationary phenomena solely to the redundancy of money and to accuse the Bank of taking advantage of the absence of a convertibility constraint to overissue the currency.
The majority, however, though recognizing "a very close connection between the ease or difficulty of issuing notes and the activity and efficiency of the redemption system," believed that legislation redesigning the redemption system was needed to prevent overissue of asset currency.
A quantity commitment solves the problem of making a credible commitment not to overissue.
Hence, the deposited money represents a bailment or a present good, and the overissue of money substitutes constitutes fraud.
Cavalcanti, Erosa, and Temzelides (1999) show, however, that each bank in a private money system (such as the Suffolk Banking System in pre--Civil War New England or the Canadian banking system prior to 1935) could have sufficient incentives to prevent overissue.
Profit incentives would restrain overissue, because people would not hold units lacking purchasing-power stability.
They argued that in the antebellum period, private banks issued notes against gold and silver reserves with no external force to check them and therefore tended to overissue notes and to engender economic instability.
9) According to Selgin and White (1994), this Procrustean means for achieving a uniform currency turned national bank notes into "quasi-high-powered" money, undermining the routine clearing and redemption of rival banknotes that normally constrains overissue of notes in a competitive note issue arrangement.
In other words, a monetary overissue occurs as "the market borrows unduly much from the bank and becomes too abundantly supplied with means of payment" (517).
How well does the banking industry foster economic growth, intermediate efficiently between lenders and borrowers, maintain stability of prices or exchange rates, avoid problems of fraud and counterfeiting, prevent the overissue of credit, and discourage bank runs and panics?
The underlying principle of this system is that central banks and governments could boost spending as they wished and ignore previous constraints against the overissue of currency and deficit finance; implicitly, they could (and did) focus on the short term and felt no compunctions whatever kicking the can down the road for other people to pick up.
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