Money Fundamentals 3.22 How is money destroyed?

Just as money is created, it can be destroyed. How money is destroyed is generally a mirror image of how it is created, though it doesn’t have to be.

If prices are rising in a fixed value money system or rising more than desired in an elastic value system, and there are no market-based reasons for this increase, then there is too much money in the system. How can some money be removed?

By not giving, or taking

If there is a pattern of giving new money into the economy every year, one could reduce the giving (in proportion to increases or decreases in population and production) until the supply was back in the desired balance. That would be the least painful way to reduce the supply of money. It would also be the most equitable means of reduction, causing the least amount of market disruption.

If for some reason, one needed a more abrupt way to take money out of the economy, whoever has the power to give it could take it back and remove it from circulation. How it is taken back, from whom, and at what rates would be determined by the government.

By not spending or saving

If increases in the money supply are made by spending money into the economy, then ceasing to spend-create will keep the amount of money constant. If the population and/or productivity continue to grow and the money supply remains constant, there will be less money in proportion to the exchanges using money. This is one way to reduce the money supply.

If population and productivity remain constant, then the money-creator could tax or demand some form of payment that would pull money back out of the economy. If this tax money was not re-spent into circulation, it would effectively be destroyed.

By not investing

When new money is created by investing in new technologies, one can simply stop investing.

By paying off debt

When new money is created by lending, then when the principal of this loan is paid back, money is extinguished. So slowing or ceasing lending is one way to reduce the money supply. Lines of credit can be reduced or eliminated. Interest rates can go up making it more expensive to borrow, reducing the number of people who can afford to borrow.

We currently use a money system in which all new money is created by lending, which I will say more about in a few sections.