From: "Adam Back"
Consider during periods of high inflation people don't like holding money, as it devalues too fast. They will hold interest bearing deposits instead.
Agreed.
During periods of high deflation, they will hold cash if it is the most attractive "investment". The result will be shortage of cash, for people who actually want to use it to make purchases because investors will buy all of it.
Right. And a shortage of anything, cash making no exception, is solved automatically (if the market is left alone). The value of a monetary unit will rise until its price will be considered (by the cash holders) high enough - that is, until they will value something else more than the cash. Shortages are NEVER a problem if the market is left alone to clear it - they simply indicate an undervaluation of the commodity.
Perhaps there are some government monetary systems in history which had this problem. For example gold with sudden shortage of gold supply, or similar.
Once you put the gov't into the equation, all bets are off :) Mark