The supply of money is intrinsically linked to assets and capital, revenue and expenditure, due to the requirements of solvency and a balanced balance sheet for banks and all organisations, including government.
When money is lent to entities on the basis of their future revenue and asset values (whether to government, organisations or individuals) then levels of risk and predictability are involved. The greater the risk taken in lending, the greater the money supply. Whether price inflation results depends on what borrowings are spent on and what prices are measured. In the lead up to the 2008/2009 financial crisis the money supply increase was ‘invested’ in houses, stocks and derivatives (unproductive assets) and this is where the price inflation took place (so, except for houses, much of it did not figure directly in the consumer price index measure of inflation).
Unfortunately, many householders were lent more than their predictable net worth over the period and could not pay back. When mortgage sales brought down the value of houses (their greatest asset) more people were caught in less and less solvent positions. Mortgage repayments were also linked to financial markets by the derivatives on them. These assets became worth less undermining the solvency of the investors in them who also had interests in other markets, so also reducing demand and assets values in those markets, and the solvency of other investors.
Time, knowledge and ideas make unpredictable the future value of assets and revenue from production – hence the risk in lending. However, there is a tight relationship between the money supply and the assets and revenue of all entities, because accounts must balance, and organisations, governments and people must be solvent.
If there is a lesson from the crisis it is to lend and borrow for investment in productive assets that produce revenue, which includes people, although we have no book value as an asset. The difficulty in investing in people is knowing who will produce revenue. The solution is to invest in everyone trying to produce product. Some products will make little revenue, many products will make some revenue, and some more products will make much revenue. Do not, however, lend for investment or consumption of assets and goods that do not directly support production, such as houses bought for investment (not living), stocks unlinked from asset value, luxuries, and derivatives – as these purchases inflate prices and expand money without expanding production.
Private banks are mandated to make profit. They will not take the risk to lend to all people trying to produce. Rather they will lend to those that already have large assets. Bank loans are also inflexible, they are either repaid or not, so banks do not get the benefit of lending to all producers, because they earn no more if the product generates much revenue or some.
Investment funds that take a stake in the individual revenue for their investment are more likely to invest funds widely, as when a product generates great revenue they will share in it. However, they will be motivated to try and select only the great revenue producers, excluding those who could earn a satisfactory revenue and those who earn little.
Governments on the other hand are best placed to take the risk of funding production to all people, and build it into a coherent policy. If the purpose of government is to enable the fulfilment and contribution of all, then that is their role. Governments can fund individual productive ventures because they also always share in those ventures which produce revenue (via taxes). By coordinating this funding with taxes, principally by collecting half of all earning revenue and distributing it via a shared base income, the greatest number of people can gain fulfilment from contributing, and total production will grow.