RoR: Forum

I have to disagree. Inflation is not the result of expansion of the money supply, it is the expansion itself.
As Mises explained in his essay "Inflation: An Unworkable Fiscal Policy":

"Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation."

I would like to recommend Frank Shostak`s "Defining Inflation": http://www.mises.org/story/908 .
(Edited by Peter Skup
on 11/17, 2:04am)

Post 1

Thursday, November 17, 2005 - 5:28am

I am still considering the article and the argument that it presents. I found something a little disturbing about the publication it appeared in however: This solicitous message appears on the right hand section of the screen: "Capitalism survives on Donations"
If you encounter a contradiction, check your premises, one of them is surely wrong!

Post 2

Thursday, November 17, 2005 - 5:40am

'Inflation' by itself is unfortunately an ambiguous word which does have different valid meanings. I have a lot of respect for the Austrians using it only to refer to expansion of the money supply since that is the key issue, but the term has widespread usage of referring to a rise in prises.

Unless someone knows unambiguous single-word alternatives, I'll stick to always clarifying 'monetary inflation' versus 'price inflation'.

Post 3

Thursday, November 17, 2005 - 7:14am

Aaron -- But as the article describes, what you call price inflation is ultimately caused by an expansion of the money supply. There is no other cause for the general rise in prices within an economic system. If the money supply were to stay the same economic growth would result in an increased level of buying power.

Peter Skip -- I fail to understand what you are saying. What is the "expansion itself" ? In you set of quotes Mises makes exactly the same argument. Are you simply disagreeing with how Dr. Williams is using the word?

- Jason

Post 4

Thursday, November 17, 2005 - 7:45am

Increase in money supply is a cause, increase in prices is an effect. It does not mean that there is no other potential cause (eg. a severe natural disaster or war could lead to widespread disruption of supply and raise prices). I would agree that 'monetary inflation leads to price inflation' is a true statement. However, that doesn't mean that the symptom is not a valid separate concept from its most common cause.

Post 5

Thursday, November 17, 2005 - 8:29am

"Are you simply disagreeing with how Dr. Williams is using the word?"

Exactly!

Post 6

Thursday, November 17, 2005 - 8:39am

Aaron,

A severe natural disaster or war would result is some prices rising and others decreasing.

The general price level is determined by only two things: the quantity of money in circulation and how fast that money circulates. Consumer expectation of rapid price increases can increase both, with disastrous results.

The point is that 'price inflation' and 'monetary inflation' are not two different kinds of inflation. Using the bare 'inflation' to refer to 'price inflation' is an attempt by statists to mislead. Until they latched on to that verbal legerdemain 'inflation' was understood to mean an increase in the supply of money.

That understanding must be rescued.

Post 7

Thursday, November 17, 2005 - 9:10am

"A severe natural disaster or war would result is some prices rising and others decreasing."

Widespread reduction in supply means lower quantity of goods and services being chased by an unchanged quantity of money, hence a general increase in prices. Yes, you could pick out individual goods and services which decrease in price anyway - but that is also possible even today where computers and electronics decrease despite money supply expansion pushing up prices in general.

"The point is that 'price inflation' and 'monetary inflation' are not two different kinds of inflation. Using the bare 'inflation' to refer to 'price inflation' is an attempt by statists to mislead."

Whether the terminology was due to some statist conspiracy or not, what you are fighting now is the prevalent usage of the term. Ask the average Joe what 'inflation' is, and if he has an answer at all it's that it means prices going up.

Trying to reclaim just the term 'inflation' to mean an increase in money supply for the general public is probably more doomed than Rand's efforts to claim 'selfishness'. Pointing out to them that monetary expansion is *why* they are seeing prices increase is definitely a valuable and noble goal, but specifically focusing on reclaiming the word 'inflation' is tilting at windmills.

Post 8

Thursday, November 17, 2005 - 5:42pm

I'm with Rick, Jason, and Walter Williams on this one.

It may take a lot of time and effort to get folks toward a productive understanding of the dynamics of reality -- but that fact isn't an excuse to not even try.

Ed

Post 9

Thursday, November 17, 2005 - 8:42pm

   The most commonly accepted definition of inlation is "an increase in the supply of money and credit relative to goods and services". Williams did not define the term for us in the article and he also did not define his use of the term "money".  In the article he is apparently refering only to the amount of printed Federal Reserve Notes in bank vaults and in private hands. If we accept this interpretation then his article is technically correct about the FED being the cause of inflation.
   A more important aspect of inflation is the "credit" aspect, because the expansion of credit has more of an impact on the economy and prices than does the printing of money (I read recently that the ratio of outstanding dollar denominated credit to cash is about 600:1 right now). Looked at in this light, the ability of the FED through policy decisions to influence credit expansion is actually quite limited. WE see this regularly in the credit markets when treasury prices routinely move in directions opposite to what the FED is trying to achieve through policy. Contrary to William's belief, the FED is NOT omnipotent. Though they can foster an environment favorable to the extesion of credit by others, they cannot create it themselves. The Japanese tried this and failed in the late 90's with interest rates at 0%. If people don't want the credit, it can't be forced on them.

Post 10

Thursday, November 17, 2005 - 9:39pm

Steven, the expansion of the money supply by the Fed does not just consist of printing money. Without going into detail the Fed is directly or indirectly responsible for all expansion of money within the American economic system. The banks do expand the quantity of money whenever they create a new checking account for example but this is done under the regulation of and with the permission and backing of the Fed. The banks knowingly create this type of money expansion because they know the Fed will bail them out in a crisis (by creating even MORE money) to avoid economic colapse.

I don't think you understood the main point of the article. Williams is arguing that if the U.S. government were to allow gold to become a form of legal tender then more and more bank customers and businessmen would demand that their transactions be gold backed transactions rather then paper money backed. If this took place inflation would slowly come to a halt because if gold becomes the primary money being used in the economy the government would no longer have the power to expand the supply. Banks would no longer be able to issue money creating checking accounts and the like and would have to operate differently. This would be the case because no one in their right mind would use such a bank any longer. Of course Williams' piece is an op ed and so he could not delve into the technical details.

- Jason

Post 11

Friday, November 18, 2005 - 12:07pm

Jason,
   The Fed as "indirectly" responsible seems more accurate.  Since it is the mechanism through which "we" have given ourselves the ability to accomodate our own thirst for money and credit, blaming the FED as THE CAUSE of inflation just seems like an easy way for us to avoid taking responsibility for our own role in the monetary expansion.
   Allowing gold as an alernate form of legal tender is a great idea because it would provide rationally minded people more choices when it comes to protecting themselves against the negative effects of inflation. When you say "no one in their right mind" would use banks that operate differently I agree wholeheartedly. But, when it comes to the financial markets, those acting in their right minds tend to be a small minority.
   "Money" can be defined objectively, but there is no power on earth which can force people to accept the same definition or assign the same value to it. Freedom of choice is what is most important, because that is what allows us to adapt most quickly to market changes in what people value, and how much they value it.

Post 12

Friday, November 18, 2005 - 12:47pm

Steven, I don't think we have a similar understanding at all of the current money system and explaining my position on a message board would be impossible. If you want to understand where Rick Pasotto, Dr. Williams and myself are coming from on these issues I suggest you read chapter 12 of George Reisman's book Capitalism which is titled "Money and Spending". This will explain Dr. Williams' point regarding the Fed and the eventual removal of the problem of inflation if the government were to allow gold to be used as money.

The book is available for free in PDF format at Reisman's website www.capitalism.net. Chapter 12 starts on page 503. You can link to it directly within the PDF by clicking the link to the chapter in the table of contents. This chapter in particular is excellent and is quite an eye opener. If you read it let me know what you think.

- Jason

Post 13

Friday, November 18, 2005 - 1:13pm

Thanks Jason, you're right. I think we're talking past each other right now. I haven't read Reisman's book yet so I'm sure my understanding is different from yours and many others'.

Post 14

Sunday, November 20, 2005 - 9:15pm

In addition to influencing the extension of credit by manipulating the fed funds rate, they also directly control the quantity of spendable money through their open market operations. The buying or selling of treasury or other securities in the open market. They have been moderate in accumulating debt in recent years (injecting money into the banking system) but when it is required, they will run the printing presses.) whether it is Volcker, Greenspan, Bernanke or someone else. That is something we can bank on along with death and taxes.

Post 15

Monday, November 21, 2005 - 10:48pm

     Uhh...like...the 'govt' is going to unilaterally give this power back that it illegally took from us? Might's well have expected Al Capone to 'straighten up and fly right.'

     As Ralph Kramden would say "Well...Hardy-Har-Har !"

     Peter Pan's NEVERLAND or Alice's LOOKING GLASS sounds much more probable.

     The proper question is: "How to get the govt to do this?"

     Aye, there's the rub!

LLAP
J:D

(Edited by John Dailey on 11/21, 10:50pm)

Post 16

Tuesday, November 22, 2005 - 3:38am

Jeeze it burns that people throw books instead of arguments! Chapter and verse?! Please! Come on and bring it!

Stephen, you shouldn't be taking that for an answer.

Jason, if you know what you're talking about, why don't you talk about it?

Post 17

Tuesday, November 22, 2005 - 8:36am

Rick, do you want me to write a book on a message board? There is no way that I can describe the paper money system in a single post. If you'll notice I did state my position in post #10. Do you have any probems with that post?

- Jason

Post 18

Tuesday, November 22, 2005 - 2:08pm

Jason, for my response please read Encyclopedia Britannica.

Post 19

Tuesday, November 22, 2005 - 3:00pm