The Map and the Territory by Alan Greenspan — TWELVE | MONEY AND INFLATION

1. 1. After the gold standard was abandoned in 1933, fiat money led to a more than fourteenfold increase in the Consumer Price Index by 2008, averaging 3.4% annual inflation.
2. 2. Central banks adopted the goal of keeping inflation down rather than keeping the price level unchanged, which acquiesced in an ever-rising price level.
3. 3. Gold and silver are unique as money because they are perceived as having intrinsic value and do not require third-party credit guarantees.
4. 4. Fractional reserve banking originated when goldsmiths realized they could lend out gold deposits that were idle, issuing more warehouse receipts than gold held.
5. 5. The average holding period of money collapses during hyperinflation as people rush to spend currency, leading to a rapid loss of purchasing power.
6. 6. People are willing to hold fiat money losing up to 5-10% per year in purchasing power, but beyond that, they become uneasy and bail out.
7. 7. Sovereign governments can run budget deficits because they can issue fiat money that the public will hold as a store of value, though for shorter periods than gold.
8. 8. Greenspan endorses Milton Friedman's view that inflation is always and everywhere a monetary phenomenon, but notes that defining 'money' is problematic.
9. 9. Greenspan finds that M2, when divided by capacity (unit M2), closely tracks the price level over the long run, with a 3.4% annual rise in both from 1933 to 2008.
10. 10. The breakdown of the M2-price link in the late 1980s was caused by banks' capital inadequacy and loan loss provisions, creating 'fifty mile-per-hour headwinds.'
11. 11. Money velocity, the ratio of nominal GDP to M2, is determined by inflationary pressure, short-term interest rates, and equity prices.
12. 12. If the money multiplier recovers at the pace seen after 1952, unit money supply and prices could rise by 6-7% per year through 2017, though this is only an illustrative simulation.