Murray N. Rothbard on Inflation - Dictionary of Arguments

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Inflation: In economics, inflation is defined as the sustained increase in the general price level for goods and services in an economy over a certain period of time, which leads to a decline in the purchasing power of money. It is usually measured by indices such as the consumer price index (CPI) or the producer price index (PPI). _____________ Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments.

> Rothbard, Murray N.	> Inflation	Murray N. Rothbard on Inflation - Dictionary of Arguments II 160 Inflation/Rothbard: Great Britain suspended specie payments indefinitely so as to permit the Bank of England, and the banking system as a whole, to maintain and greatly expand the previously inflated system of fractional reserve banking. Accordingly, the bank was able to greatly inflate credit and the money supply of notes and deposits. >Gold standard/Rothbard, >Central banks/Rothbard, >Bullionism/Rothbard. Rothbard III 990 Def Inflation/Rothbard: The process of issuing pseudo warehouse receipts or, more exactly, the process of issuing money beyond any increase in the stock of specie, may be called inflation.⁽¹⁾ Def Deflation/Rothbard: A contraction in the money supply outstanding over any period (aside from a possible net decrease in specie) may be called deflation. Clearly, inflation is the primary event and the primary purpose of monetary intervention. There can be no deflation without an inflation having occurred in some previous period of time. Interventions: A priori, almost all intervention will be inflationary. For not only must all monetary intervention begin with inflation; the great gain to be derived from inflation comes from the issuer's putting new money into circulation. >Quasi-money/Rothbard, >Money/Rothbard, >Money substitutes/Rothbard. Money supply: The increasing money supply is only a social waste and can only advantage some at the expense of others. And the benefits and burdens are distributed as just outlined: the early-comers gaining at the expense of later-comers. Credit expansion/Rothbard: If inflation is any increase in the supply of money not matched by an increase in the gold or silver stock available, the method of inflation just depicted is called credit expansion - the creation of new money-substitutes, entering the economy on the credit market. As will be seen below, while credit expansion by a bank seems far more sober and respectable than outright spending of new money, it actually has far graver consequences for the economic system, consequences which most people would find especially undesirable. This inflationary credit is called circulating credit, as distinguished from the lending of saved funds - called commodity credit. Rothbard III 991 Prices/New equilibrium: (…) prices will not have increased uniformly in the new equilibrium; the purchasing power of the monetary unit has fallen, but not equiproportionally over the entire array of exchange-values. Since some prices have risen more than others, therefore, some people will be permanent gainers, and some permanent losers, from the inflation.⁽¹⁾ Victims of inflation: Particularly hard hit by an inflation, of course, are the relatively "fixed" income groups, who end their losses only after a long period or not at all. Pensioners and annuitants who have contracted for a fixed money income are examples of permanent as well as short-run losers. Life insurance benefits are permanently slashed.⁽²⁾ Rothbard III 992 Investment/consumption: Inflation also changes the market's consumption/investment ratio. Superficially, it seems that credit expansion greatly increases capital, for the new money enters the market as equivalent to new savings for lending. Since the new "bank money" is apparently added to the supply of savings on the credit market, businesses can now borrow at a Iower rate of interest; hence inflationary credit expansion seems to offer the ideal escape from time preference, as well as an inexhaustible fount of added capital. Actually, this effect is illusory. On the contrary, inflation reduces saving and investment, thus Iowering society's standard of living. It may even cause large-scale capital consumption. 1) In the first place, as we just have seen, existing creditors are injured. This will tend to discourage lending in the future and thereby discourage saving-investment. 2) Secondly (…) the inflationary process inherently yields a purchasing-power profit to the businessman, since he purchases factors and sells them at a later time when all prices are higher. The businessman may thus keep abreast of the price increase (we are here exempting from variations in price increases the terms-of-trade component), neither Iosing nor gaining from the inflation. But business accounting is traditionally geared to a world where the value of the monetary unit is stable. Rothbard III 993 Capital goods: Capital goods purchased are entered in the asset column "at cost," i.e., at the price paid for them. When the firm later sells the product, the extra inflationary gain is not really a gain at all; for it must be absorbed in purchasing the replaced capital good at a higher price. Inflation, therefore, tricks the businessman: it destroys one of his main signposts and leads him to believe that he has gained extra profits when he is just able to replace capital. Accounting error: The accounting error stemming from inflation has (…) economic consequences. The firms with the greatest degree of error will be those with capital equipment bought more preponderantly when prices were Iowest. If the inflation has been going on for a while, these will be the firms with the oldest equipment. Their seemingly great profits will attract other firms into the field, and there will be a completely unjustified expansion of investment in a seemingly high-profit area. Conversely, there will be a deficiency of investment elsewhere. Allocation: Thus, the error distorts the market's system of allocating resources and reduces its effectiveness in satisfying the consumer. The error will also be greatest in those firms with a greater proportion of capital equipment to product, and similar distorting effects will take place through excessive investment in heavily "capitalized" industries, offset by underinvestment elsewhere.⁽³⁾ >Credit expansion/Rothbard, >Time preference/Rothbard, >Money supply/Rothbard. Rothbard III 1018 Inflation/Rothbard: When the government and the banking system begin inflating, the public will usually aid them unwittingly in this task. The public, not cognizant of the true nature of the process, believes that the rise in prices is transient and that prices will soon return to "normal." Hoarding: (…) people will therefore hoard more money, i.e., keep a greater proportion of their income in the form of cash balances. >Hoarding/Rothbard, >Cash balance/Rothbard. Demand for money/prices: The social demand for money, in short, increases. As a result, prices tend to increase less than proportionately to the increase in the quantity of money. Government: The government obtains more real resources from the public than it had expected, since the public's demand for these resources has declined. Eventually, the public begins to realize what is taking place. Government: It seems that the government is attempting to use inflation as a permanent form of taxation. But the public has a weapon to combat this depredation. Consumption: Once people realize that the government will continue to inflate, and therefore that prices will continue to rise, they will step up their purchases of goods. For they will realize that they are gaining by buying now, instead of waiting until a future date when the value of the monetary unit will be Iower and prices higher. In other words, the social demand for money falls, and prices now begin to rise more rapidly than the increase in the supply of money. Hyperinflation: When this happens, the confiscation by the government, or the "taxation" effect of inflation, will be Iower than the government had expected, for the increased money will be reduced in purchasing power by the greater rise in prices. This stage of the inflation is the beginning of hyperinflation, of the run-away boom.⁽⁴⁾ Demand for money: The Iower demand for money allows fewer resources to be extracted by the government, but the government can still obtain resources so long as the market continues to use the money. Prices: The accelerated price rise will, in fact, lead to complaints of a "scarcity of money" and stimulate the government to greater efforts of inflation, thereby causing even more accelerated price increases. Flight from money: This process will not continue long, however. As the rise in prices continues, the public begins a "flight from money," getting rid of money as soon as possible in order to invest in real goods - almost any real goods - as a store of value for the future. Prices: This mad scramble away from money, Iowering the demand for money to hold practically to zero, causes prices to rise upward in astronomical proportions. The value of the monetary unit falls practically to zero. The devastation and havoc that the runaway boom causes among the populace is enormous. Society: The relatively fixed-income groups are wiped out. Production declines drastically (sending up prices further), as people lose the incentive to work - since they must spend much of their time getting rid of money. The main desideratum becomes getting hold of real goods, whatever they may be, and spending money as soon as received. Market: When this runaway stage is reached, the economy in effect breaks down, the market is virtually ended, and society reverts to a state of virtual barter and complete impoverishment.⁽⁵⁾ Commodities are then slowly built up as media of exchange. The public has rid itself of the inflation burden by its ultimate weapon: Iowering the demand for money to such an extent that the government's money has become worthless. When all other limits and forms of persuasion fail, this is the only way - through chaos and economic breakdown - for the people to force a return to the "hard" commodity money of the free market. Rothbard III 1021 Interventions: Movements in the supply-of-goods and in the demand-for-money schedules are all the results of voluntary changes of preferences on the market. The same is true for increases in the supply of gold or silver. But increases in fiduciary or fiat media are acts of fraudulent intervention in the market, distorting voluntary preferences and the voluntarily determined pattern of income and wealth. Def Inflation/Rothbard: Therefore, the most expedient definition of "inflation" is: an increase in the supply of money beyond any increase in specie.⁽⁶⁾ Rothbard III 1022 RothbrdVsGovernment policies: The absurdity of the various governmental programs for "fighting inflation" now becomes evident. Most people believe that government offcials must constantly pace the ramparts, armed With a huge variety of "control" programs designed to combat the inflation enemy. Yet all that is really necessary is that the government and the banks (…) cease inflating.⁽⁷⁾ Inflationary pressure: The absurdity of the term "inflationary pressure" also becomes clear. Either the government and banks are inflating or they are not; there is no such thing as "inflationary pressure."⁽⁸⁾ 1. Cf. Mises, Theory of Money and Credit. New Haven, Conn.: Yale University Press, 1953 and 1957 Reprinted by Liberty Fund, 1995. pp. 140-42. 2. 1081 The avowed goal of Keynes' inflationist program was the "euthanasia of the rentier." Did Keynes realize that he was advocating the not-so-merciful annihilation of some of the most unfit-for-labor groups in the entire population - groups whose marginal value productivity consisted almost exclusively in their savings? Keynes, The General Theory of Employment, Interest and Money. New York: Harcourt, Brace & Co., 1936. Reprinted by Prometheus Books, 1997. p. 376. 3.For an interesting discussion of some aspects of the accounting error, see W.T. Baxter, "The Accountant's Contribution to the Trade Cycle," Economica, May, 195 5 , pp. 99-112. Also see Mises, Theory of Money and Credit, New Haven, Conn.: Yale University Press, 1953 and 1957. Reprinted by Liberty Fund, 1995. pp. 202-04; and Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 546 f. 4. Cf. the analysis by John Maynard Keynes in his A Tract on Monetary Reform (London: Macmillan & Co., 1923), chap. ii, section 1. 5. On runaway inflation, see Mises, Theory of Money and Credit, New Haven, Conn.: Yale University Press, 1953 and 1957. Reprinted by Liberty Fund, 1995. Mises, Richard von. Probability, Statistics, and Truth, 2nd ed. New York: Macmillan, 1957. Reprinted by Dover Publications, 1981. pp. 227-31. 6. Inflation is here defined as any increase in the money supply greater than an increase in specie, not as a big change in that supply. As here defined, therefore, the terms "inflation" and "deflation" are praxeological categories. See Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 419-20. But also see Mises' remarks in Aaron Director, ed., Defense, Controls, and Inflation (Chicago: University of Chicago Press, 1952), p. 3 n. 7. See George Ferdinand, "Review of Albert G. Hart, Defense without Inflation," Christian Economics, Vol. III, No. 19 (October 23, 1951). 8. See Mises in Director, Defense, Controls, and Inflation, p. 334. _____________ Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.	Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977

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