When you have a growing economy but a fixed money supply, money will appreciate. When this happens, people will prefer to keep money rather than spend it, and you get deflation-induced recessions/depressions. See the latter part of the 19th century in the US for repeated examples of this.
It should be noted that other countries at the time had similar currency restrictions yet they didn't have the bank runs and depressions that the US had. Economists like Eugene White believe there were other, possibly even more influential, factors in those panics, like the branching restrictions, which made banks more fragile.
Exactly, and I'd like to point out that you having to explain this goes to show we aren't teaching economics properly (or at all) in school. The school systems focus on make sure our children are well rounded in every way except financially.
In regards to the concept above: even if kids take macro, they'll remember this concept for about 6 months ....and it's gone.
This is like lamenting that kids don't know enough about Chaucer or don't understand that evolution only applies to populations, not to individuals.
These kinds of small details will be forgotten intentionally by most people within months of learning them.
Quite frankly: I don't care if kids come out of high school with a functional knowledge of the effects of an inflating currency: I'd rather they understand personal finance instead of macroeconomics.
Well put, I wholeheartedly agree that personal finance should should come first. I do think the concepts of supply and demand, hording, etc.. can be taught very simply and once they sink in once they can be reapplied to a variety of situations.
What's wrong with that though? So people will end up not spending money unless it's very valuable to their lives. So less money gets spent on Angry Birds, iPad Minis, and games. Makes entrepreneurs have to up their game if they want people to spend money on them.
Literally the entire purpose of currency is to facilitate trade. Having a fixed money supply penalizes and discourages trade, and encourages currency hoarding.
People on the bottom rung end up spending all of their money, and will find it even harder to ever dig their way out. The top 1%, who cannot spend money fast enough to exhaust it, will hold onto their money which will become exponentially more valuable over time.
Capital investment will plummet, because statistically, you're better off simply holding your money. It's like holding an index fund in the stock market (your money increases with value correlated to the market), except there is practically zero risk. Any investment you make by definition will perform on average no better than the economy as a whole; so why bother investing your money with risk, as opposed to holding onto your money with no risk? They both have the same expected value.
