Comments (12)

• Conza88

  “Inflation may be defined as any increase in the economy’s supply of money not consisting of an increase in the stock of the money metal.” – What has Government Done to Our Money? p. 43. Murray N. Rothbard

  Published: October 29, 2009 11:40 AM

• Mike Sproul

  Rothbard believed that a 10% increase in the quantity of money, other things equal, would cause the money unit to lose 10% of its value. So he would have looked at a world where real output of goods grew by 10% at the same time that the money supply grew 10%, and decide that even though the price level wouldn't have changed, there was still 10% inflation. Hence his definition of inflation as an increase in the money supply.

  The problem is that there is another theory of money. According to the backing theory, a bank that increases its issue of money by 10% will normally increase its assets by 10% as well. The amount of backing per unit of money is unchanged, so the currency unit will hold its value even though there is 10% more money chasing the same amount of goods. In this case it is meaningless to say that the 10% increase in the money supply was equivalent to 10% inflation.

  To take another case, suppose that a bank that had issued money was robbed of 10% of its assets. The backing theory says that the value of each currency unit would fall by 10% as a result, but Rothbard's definition would claim there had been no inflation, since the quantity of money had not changed.

  Published: October 29, 2009 5:56 PM

• Peter

  Rothbard believed that a 10% increase in the quantity of money, other things equal, would cause the money unit to lose 10% of its value.

  No he didn't. He clearly and repeatedly stated that would be extremely unlikely to the point of being complete nonsense (much like the rest of what you post every single time the subject comes up, for years!)

  Published: October 29, 2009 7:58 PM

• Mike Sproul

  "It is clear that while everyone would be euphoric from their seeming doubling of monetary wealth, society would in no way be better off: for there would be no increase in capital or productivity or supply of goods. As people rushed out and spent the new money, the only impact would be an approximate doubling of all prices, and the purchasing power of the dollar or franc would be cut in half, with no social benefit being conferred."

  --Murray Rothbard, The Case Against the Fed.

  Unwary I! for failing to add the word "approximate".

  Published: October 29, 2009 8:56 PM

• EIS

  This article, at first, seemed to defend the free banking definition of inflation, namely an increase in the supply of money not met with a proportional increase in the demand for cash holdings. But the middle and latter part of the piece has left me quite confused regarding the affects of any increase in the supply of money (met with an increased demand for cash holdings or not).

  The author says; "On the other hand, given that for Mises money is not neutral by definition and prices are not in equilibrium, every change in the quantity of money always has effects on relative prices, but not every change in relative prices is due to inflation."

  Here, it seems that any change in the quantity of money will have disturbing affects on the structure of production (either horizontally or vertically, or both), implying a misallocation of resources, and an inevitable cluster of error (bust), if caused by an arbitrary increase in the money supply. Relative price changes with a fixed money supply is quite natural, and in fact, depicts real world phenomena (accurate price changes). Now Mises may not believe that this misallocation is caused by the definition of inflation he put forth, but it seems to have the affects of inflation as defined by Austrians today.

  Hayek, in Prices and Production, says that an increase in the supply of money, given directly to consumers, would have the same effect as increasing the supply of credit money for producer's (in the long run), namely a contraction in the structure of production. Thus, the real question isn't what the real definition of inflation is, but whether any increase in the supply of money effects the structure of production, and/or intertemporal equilibrium (does it affect the interest rate?).

  Published: October 29, 2009 11:28 PM

• Ivo

  The real question isn't what's the real definition of inflation is, but whether any increase in the supply of money effects the structure of production, and/or intertemporal equilibrium (does it affect the interest rate?).

  I would say that any change, under any monetary system, on the supply and/or the demand side of money affects relative prices and intertemporal equilibrium to certain extent.

  Money is always non neutral. The issue is which system is the less disruptive, cause simply there's no perfect system.

  Published: October 30, 2009 10:26 AM

• Peter

  Mike Sproul: read the previous sentence: he's talking there about an angel doubling every dollar in an instant. Not a realistic scenario.

  Published: October 30, 2009 7:16 PM

• PirateRothbard

  Ok, I'm the type who's willing to admit his ignorance here.

  It has always seemed to me that some Austrians seem to believe that a fractional reserve system, even if created by the free market, is fraud. But I really don't understand who's being defrauded. Certainly the one making deposit almost always knows the risk he's taking.

  I don't understand how we can debate the merits of 100% vs. fractional reserve when it seems we have to let the market decide that. Someone enlighten me here.

  Published: November 2, 2009 9:44 AM

• newson

  this paper was available in draft form in mises.org media section. seems to be substantially the same paper.

  Published: November 2, 2009 6:22 PM

• Michael A. Clem

  It has always seemed to me that some Austrians seem to believe that a fractional reserve system, even if created by the free market, is fraud. But I really don't understand who's being defrauded.
  
  Those who aren't necessarily against fractional reserve banking point out that customers can willingly agree to bank at banks that openly engage in FRB. Fine, that's a contract between the customer and the bank. But what of third parties who accept the money created by such a fractional reserve bank, people who do not have a contract with the bank? Is there an implicit contract for having accepted the devalued money? Not if you can't distinguish it from the money issued by all other banks.
  
  Fractional reserve banking devalues the money for all who use it, not just those who agree to it. The only way I can see to legitimize it is through free banking, where each bank can put its name or mark on the "new money" it creates. Only if you can distinguish between one bank's money from another's can the recipient of the money be free to accept or reject it, if they agree or disagree with the devaluation caused by fractional reserve banking. Otherwise, it is fraudulent because devalued money is pretending to be the same as non-devalued dollars, and as the devaluation goes through the economy, even the non-devalue-issued money is necessarily devalued.

  Published: November 3, 2009 10:03 AM

• newson

  to pirate rothbard:
  it's fraud in the sense that the language still suggest that a "deposit" account is, in fact, a deposit. if the language were changed in order that the legal status mirror the economic, then perhaps the issue of fraud wouldn't be raised so strenuously. sure, you can say, as do the free-bankers, that everyone really knows what's being meant, but then why not change the language accordingly?

  i would suggest a "ponzi account" accurately reflects the reality of the risks and rewards that the operation involves.

  Published: November 4, 2009 5:03 PM

• PirateRothbard

  Thanks for the responses guys. At least we all agree to fight socialism.

  Published: November 5, 2009 12:48 PM