The boring wisdom is that a bigger economy needs more money.
I will rephrase it. The unit of account should remain stable in respect to what it tracks. If the unit of account is grains and grains spoil then capturing that spoilage in the unit of account does not constitute a breach in stability. E.g. persistent background inflation is often caused by "natural" processes.
If you have a limited quantity of the unit of account then the unit of account will have to change and then people start betting on how the unit of account changes, rather than do productive work.
Here is a makeshift analogy:
A court is in charge of the unit of account and can set it directly and arbitrarily.
A family has borrowed 120 units (representing 10 years of labor) to build a house.
One year later the judge changes the unit of account so that 1 unit = 2 months of labor.
The family has to pay back 20 years of labor to pay off the house.
People now stop borrowing and start speculating on the unit of account because it is other people who have to work and they hope that the unit of account goes up to 1 unit = 10 months of labor so that they can retire.
There is an obvious problem. The family can simply default and the obligation to work 100 years vanishes into thin air.
The lesson here is that work should be more profitable than speculation.
You're explaining why deflation is bad and why growth in money supply is good.
I'd say deflation is okay as long as it is consistent with deflationary expectations. Unexpected deflation is bad, expected inflation is built into borrowing costs.
I don't understand how this is in contradiction with what I'm saying.
I will rephrase it. The unit of account should remain stable in respect to what it tracks. If the unit of account is grains and grains spoil then capturing that spoilage in the unit of account does not constitute a breach in stability. E.g. persistent background inflation is often caused by "natural" processes.
If you have a limited quantity of the unit of account then the unit of account will have to change and then people start betting on how the unit of account changes, rather than do productive work.
Here is a makeshift analogy:
A court is in charge of the unit of account and can set it directly and arbitrarily.
A family has borrowed 120 units (representing 10 years of labor) to build a house.
One year later the judge changes the unit of account so that 1 unit = 2 months of labor.
The family has to pay back 20 years of labor to pay off the house.
People now stop borrowing and start speculating on the unit of account because it is other people who have to work and they hope that the unit of account goes up to 1 unit = 10 months of labor so that they can retire.
There is an obvious problem. The family can simply default and the obligation to work 100 years vanishes into thin air.
The lesson here is that work should be more profitable than speculation.