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What is clear is that monetary arrangements have seldom been left entirely to the market, even in societies following a thoroughly liberal policy in other respects, and that there are good reasons why this should have been the case. These reasons can perhaps be elucidated best by considering the operation of a pure commodity standard, which at first sight seems to require no government intervention. Let us conceive of a modern society in which all money consists exclusively of physical units of a commodity or literal warehouse receipts for the commodity.

The resulting flood of gold produced the price inflation that Bryan and his followers had wanted to achieve with silver. From 1896 to 1913 wholesale prices in the United States rose by 50 per cent. The Contraction of 1907-08 The only major contraction during this period was the contraction of 1907-08, which was accompanied and intensified by the banking panic of 1907 and by the associated suspension of convertibility of bank deposits into currency. Though relatively brief, the contraction was severe.

Page 8 These, then, are the features of money that justify government intervention: the resource cost of a pure commodity currency and hence its tendency to become partly fiduciary; the peculiar difficulty of enforcing contracts involving promises to pay that serve as a medium of exchange and of preventing fraud in respect to them; the technical monopoly character of a pure fiduciary currency which makes essential the setting of some external limit on its amount; and, finally, the pervasive character of money which means that the issuance of money has important effects on parties other than those directly involved and gives special importance to the preceding features.