Mariana Fights Inflation, 1605
Men from past centuries have warned us: men from the Old World, men steeped in theology and ethics who studied how man interacted with man in the market. One of these men, writes Bart Fuller, was Father Juan de Mariana, S.J., and through a recent English translation of one of his works he now speaks to the New World too. Mariana wrote with the hope that the king and his court would be dissuaded from further debasing the realm's money. FULL ARTICLE
Comments (20)
Was Mariana one of the scholastics at Salamanca? The economic writings of the late scholastics is both amazing and depressing--amazing that they understood so much so early, depressing that their wisdom is held in such low esteem by economists, politicians, the media and most people.
Published: July 23, 2008 9:15 AM
check out:
www.juandemariana.org/
Published: July 23, 2008 9:46 AM
"Let us join Father Mariana in prayer, "beg[ging] God to shed His light upon the eyes and minds of those who are responsible for these things, so that they may peacefully agree to embrace and put it into action wholesome advice, once it is known." "
Good Article, unfortunately prayer didn't help then and it won't help now. The FED and most of Congress knows what is going on, they are not ignorant of what they are doing.
In a sense they are in a bind that the Collectivist strategies have brought them at the price of the loss of more and more Individual liberties. 'The road to Hell is paved with good intentions'. Let us pray?.
Published: July 23, 2008 10:37 AM
First, there will never be exactly zero change in the money supply no matter how measured, so the option is either toward inflation or deflation. A moderate inflation, say 2% to 3% helps the working class (the borrowing class) because they pay their loans with cheaper dollars. The alternative is to help the banks and money lenders.
Second, as the population increases the money supply must increase else money in circulation per person decreases. What is the preferred method for increasing the money supply?
How about the "Monopoly" system? Every registered voter passes GO on his birthday and receives a $100 gift from the Treasury, to be raised by selling Birthday Bonds. Better, each registered person is given a Birthday Bond. This will encourage personal savings.
Published: July 23, 2008 11:45 AM
A moderate inflation, say 2% to 3% helps the working class (the borrowing class) because they pay their loans with cheaper dollars. The alternative is to help the banks and money lenders.
Of course there will never be exactly zero change in the money supply, but that doesn't mean there can't be an "option" towards minimal change, as opposed to deliberately increasing or decreasing the supply.
And, yes, inflation helps borrowers, but it also decreases the value of the workers' earnings, so it's not necessarily a boon to the working class, especially since new money goes into the financial markets, and thus helps the bankers most.
And what does it matter if the money in circulation per person decreases? Why are we supposed to fix the supply of money on a per person basis?
Published: July 23, 2008 12:00 PM
billwald: “A moderate inflation, say 2% to 3% helps the working class (the borrowing class) because they pay their loans with cheaper dollars.”
Moderate inflation only helps borrowers if the onset is unexpected. Once moderate inflation becomes expected, banks add the rate of inflation to the interest rate. In addition, who are the lenders that you want to shaft? They’re the working class people with savings and mutual funds for the most part.
And as Michael points out, wages never keep up with price inflation, so workers always lose.
Published: July 23, 2008 1:38 PM
I recently read an article in Newsweek in regards to the economy which said that the readoption of the Gold Standard in the early nineteenth century (I forget by which president) led to a depression. Could someone tell me where the journalist might have erred and what really caused the depression?
Published: July 23, 2008 2:29 PM
Mr. huh?
Try this: http://mises.org/books/panic1819.pdf
Published: July 23, 2008 2:48 PM
The ignorance of saying that a moderate inflation helps borrowers is in the assumption that lenders don't know inflation is happening.
Of course they know it is going to occur, so lenders don't lend unless at a rate which takes inflation into account so that they still profit.
The same thing happens in a deflationary situation: Lenders and borrowers both lower their interest expectations.
It is only when there is intervention in the money supply that these priorities get screwed up, and we end up with a business cycle.
No, you don't need "more" money as a population grows, unless you have ordained that prices cannot change. Because money is fungable, you can have dimes as easily as dollars, pennies and mills rather than dimes, if that's the way prices go.
The denomination is irrelevant, only its use as money counts. To admit that by touting inflation as valid, yet denying that deflation is just as valid, is irrational.
Published: July 23, 2008 4:00 PM
Mr. Huh?:"Could someone tell me where the journalist might have erred and what really caused the depression?"
That has happened quite often. However, the cause of the depression wasn't the readoption of gold, but the adoption of gold at too low of a price. In the past, countries often abandoned the gold standard for paper money during war in order to inflate the supply of paper money to pay for the war. After the war they would return to the gold standard at the pre-war price, pretending that they hadn't inflated the supply of paper money beyond reason. But the amount of paper was much greater after the war than before, so the state had to burn a lot of paper money in order to get back to the pre-war level. The dramatic decrease in the money supply caused the depression. Had the country not inflated the paper money supply during the war, the return to the gold standard would have been effortless and caused no changes in the economy.
Published: July 23, 2008 5:00 PM
Well M. Sproul does raise good points about the money supply at least with regards to how more money can enter the system whilst not necessarily leading to inflation. After all, in a world where, say, tomatoes, is hand grown and expensive - a farmer who then creates a method for mass production of tomatoes does the same thing - he produces so much tomatoes that the price falls and his competitors are ruined whilst the new farmer and the customers are happy. Yet it'd be pointed out that's life. Similarly, in the computer industry, new hardware displaces old hardware, new customers and producers win and old producers and customers lose. Likewise someone in the early 1800s expecting to be paid in a bar of aluminium was expecting to be with that which would have a great deal of buying power yet at the end of the 1800s a bar of aluminium it wasn't. It would be said time those who lost could regain their position but there's the 'tough luck' factor for being too slow in the market. After all who's to say in the modern fast-changing economies of the world that inflation automatically favours the 'bad guys' and hurts the 'good guys'? Are the 'good guys' merely those who aren't changing with the world and therefore are relying on a static wealth picture whereas the 'bad guys' are, in reality, doing something to make a difference in the world and are borrowing money to make it happen?
Published: July 23, 2008 7:10 PM
Curt wrote
The ignorance of saying that a moderate inflation helps borrowers is in the assumption that lenders don't know inflation is happening.
Of course they know it is going to occur, so lenders don't lend unless at a rate which takes inflation into account so that they still profit.
The problem is that since inflation is determined by human action that will take place in the future, the appropriate "inflation premium" is not known in advance. (Even Bernanke does not yet know what future inflation will be, since he will make his decision(s) based on information on events that have not yet occurred.) Lenders usually get their money back by adding a premium after the fact. Insurance companies do the same with respect to unexpectedly high casualty loses.
Published: July 23, 2008 7:11 PM
Thanks for the healthy dose of history of economic thought and classical liberalism. It is like the intake of anti-oxidants purging the system of free radicals (the toxins accumulating from all the misinformation foisted upon us by the ego-driven interventionists).
Let's all work to continue the legacy!
Published: July 23, 2008 9:10 PM
I see a flaw in his argument:
"And finally, add a tariff on imported luxury items."
I am compelled to think that any tariff is bad for the economy.
Published: July 24, 2008 1:04 AM
I see a flaw in his argument:
"And finally, add a tariff on imported luxury items."
I am compelled to think that any tariff is bad for the economy.
Published: July 24, 2008 1:05 AM
Walt, Lenders usually get their money back by adding a premium after the fact.
How do they alter an existing contract so that the borrower has to pay more?
Instead, as we're seeing with the banks going bust right now, when the inflation premium is misjudged then the balance sheets show the mistake after the fact, adjustments have to be made to new contracts to cover the earlier losses if possible. This is the Austrian Business Cycle.
As you point out, the future inflation rate is unknown, so it's all just guessing. With a fiat currency, this leads to the business cycle, where a massive number of guesses were wrong at about the same time.
So even in a commodity currency environment, where general deflation exists because of increases in population and efficiencies while the commodity supply stays comparatively constant, the only surprise that could cause a business cycle would be if someone discovered a huge deposit of whatever the commodity is, for instance gold (a la Spain in the 1500s).
So the choice seems to be having a fiat currency and having general impoverishment punctuated by depressions every couple of decades, or having a commodity currency, wealth creation regardless of denomination for everyone, but risk having a short depression every few thousand years as the commodity supplies fluxuate. (that is, if everyone is silly enough not to have diversified)
This is such a difficult choice!
Published: July 24, 2008 8:32 AM
I appreciate this article one for the knowledge it imparts on us and the references for us to research on our own. Second, I enjoyed reading all the replies as those much more intellegent than I discuss with such great arguments for and against it solidifies that it was a great article for the discussion it provokes. Thanks Mr Fuller!
Published: July 24, 2008 8:57 AM
TLWP: “After all, in a world where, say, tomatoes, is hand grown and expensive - a farmer who then creates a method for mass production of tomatoes does the same thing - he produces so much tomatoes that the price falls and his competitors are ruined whilst the new farmer and the customers are happy.”
There are several things wrong with that analogy.
1)It compares an impossible fantasy world with the reality. It’s impossible to invent a method of tomato production that will increase the volume of tomatoes that can match the historical increase in the money supply. The money supply has been increased in the past by 1000%. Such an increase is impossible with tomatoes or any other form of production, even gold. This physical limit on the increase in production is the primary point with money that Mike refuses to address.
2)In a fantasy world where one farmer could increase the total world production of tomatoes by say 50%, he has caused price inflation, you just ignore it. You wrote that “the price falls.” That means that the price of tomatoes falls relative to other goods. So in terms of tomatoes, all other goods are more expensive. That is price inflation.
3)Tomato production costs money and time. The research for new types of tomatoes and new production methods is very expensive. The land on which to grow tomatoes, the seed and labor cost money. Someone has written that banks also cost money to operate, but banks operations would cost money whether or not they created new money through FRB. If gold was money and banks had to keep 100% reserves for loans, they would still require pretty much the same buildings for branches and the same number of employees as they would need under FRB. Without the power to create money that FRB offers, banks would have to charge customers a custodial fee and/or make a profit from administering loans. With FRB, the marginal cost of creating new money is zero. And unless free banking exists, banks under FRB have no limit to the amount of new money they can create.
Published: July 24, 2008 9:34 AM
Curt
What you say is obviously correct.
What I was saying that compensation for past losses is built into future contracts. We can see this by how long both long and short term interest rates remained in double digits after the Jimmy Carter blowout.
Insurance companies in the US get a feather bed from the State Insurance Commission, and also, rates are adjusted annually.
Banks are currently being bailed out for existing loans by Fed interference artificially lowering the banks cost of borrowing (to below the core inflation rate). However, as we have seen over the last year, the inflation caused by this Fed action has led to a huge increase in the (dollar denominated) price of commodities.
Published: July 24, 2008 9:37 AM
this Fed action has led to a huge increase in the (dollar denominated) price of commodities.
And don't you know I wish I'd bought more gold at $260 when I first realized it was on a serious upswing!
Published: July 24, 2008 3:20 PM