24
Jul
2014
On Mises’ Use of the Term “Inflation”
Since there have been attempts lately to argue that modern-day Misesians are incorrectly stating the master’s position, I thought it helpful to clarify.
Since there have been attempts lately to argue that modern-day Misesians are incorrectly stating the master’s position, I thought it helpful to clarify.
And Mises and modern Austrians are wrong that “inflation” originally only meant an increase in the money supply:
http://socialdemocracy21stcentury.blogspot.com/2014/07/austrians-and-definition-of-inflation.html
E.g.,
“The experience of English commerce has, however, proved, that a casual inflation of the price of domestic, and depression of that of external products, may be the basis of permanent commerce.”
Say, Jean Baptiste. 1821. A Treatise on Political Economy; or, The Production, Distribution, and Consumption of Wealth (vol. 1; trans. by C. R. Prinsep from 4th French edn.). Longman, Hurst, Rees, Orme, and Brown, London. p. 176.
“And Mises and modern Austrians are wrong that “inflation” originally only meant an increase in the money supply:”
Yet – as far as I can tell, anyways – absolutely correct that the first (economic) definition only included price.
These pointless discussion about the meaning of words and phrases are something shared by hard-line Austrians and Post-Keynesian.
I notice some Post-Keynsians get quite upset if people use the phrase “liquidity trap” in other than their special meaning of the term.
http://fixingtheeconomists.wordpress.com/2014/07/23/paul-krugman-does-not-understand-the-liquidity-trap/
Of course, where would we be without pointless discussions though?
Are you trying to start a pointless discussion about pointless discussions ?
I gotta say, if I read one more post about who defined inflation how when, I’m throwing my ipad out the window….
Yikes! I reckon some of us take pointless discussions better than others.
“Yet – as far as I can tell, anyways – absolutely correct that the first (economic) definition only included price.”
And where is this “definition”? In what work?
Where are your examples of the sole use of the word “inflation” with no qualifier but **before 1821* *in the sense of “increase in the money supply”.?
Why before 1821? When did I make that the cutoff date for first definition?
Anyways, the first definition I can find is from 1864, Websters.
Inflation OF PRICES means inflation alone does not mean rise in prices.
Show me an example of the sole use of the word “inflation” with no qualifier but **before 1821 **in the sense of “increase in the money supply”.
Show me the evidence.
Show me the evidence that inflation on its own referred to rising prices, before it referred to money supply increase.
You keep shifting from defining a word to the sense of the usage.
E.G.
“inflation of the price” YOU
vs
“inflation”
Your whole silly post was based on,
“This can be clearly seen to anyone who does a few minutes of searching on Google Books for the word “inflation” in the 19th century, or in Google Ngram Viewer.
The following graph (which needs to be opened in a separate window to be read properly) shows the usage of the expressions “inflation of money,” “inflation of currency,” “inflation of prices,” “inflated prices,” “inflation of the currency,” and “inflation of the money” in Google Ngram Viewer.”
Further, it doesn’t matter if in 1899 xyz called “inflation” a rise in prices and in 1900 Mises called it a rise in money stock. The definition they preferred was the supply of money. The ENTIRE argument was about us redefining the word “inflation” NOW to make excuses for failed predictions of inflation.
I never once heard Schiff excuse his PRICE inflation predictions by claiming that he actually meant MONETARY inflation. When someone says “there is no inflation”, Schiff rebuts, “but QE is inflation as it was originally defined”. He acknowledges what the context of the “no inflation” statement and adding his own statement with new context. He has not been vindicated whatsoever and he repeatedly states (as many gold bugs do) that THE inflation (price) is coming…….. it is just hibernating for some reason Schiff can’t explain.
Give it up already.
Or how about this. Find a single popular Austrian “cultist” that has attempted to use the various definitions to vindicate their false predictions of price inflation (include the full context).
I am not accusing Austrians of reinventing the meaning of the word inflation after 2009, as Noah Smith did.
I am talking about the meaning the word inflation had when it was first used in an economic sense.
Show me an example of the sole use of the word “inflation” with no qualifier but **before 1821** in the sense of “increase in the money supply”.
I don’t care what it might have been. It was commonly used by Austrian economists in regards to money supply….. It doesn’t matter. Everyone references prices or money supply in one way or another. Aren’t there better things to quibble about?
Then Austrians should stop quibbling about the widespread use of the word inflation to mean “increase in the general price level.”
Pretty sure there would be no quibbling if the price increase definition folks stopped quibbling with Austrians for using a money supply based definition.
Bob Murphy,
MF brought this specific quote from Human Action, and I responded here:
http://consultingbyrpm.com/blog/2014/07/potpourri-218.html#comment-740481
and then here:
http://consultingbyrpm.com/blog/2014/07/potpourri-218.html#comment-740754
http://consultingbyrpm.com/blog/2014/07/potpourri-218.html#comment-740879
http://consultingbyrpm.com/blog/2014/07/potpourri-218.html#comment-742519
Prices can’t rise if money supply doesn’t first increase.
The CPLie is a ruse perpetuated by our overlords.
Here is Warren Mosler on “inflation”. Page 71 “Soft Currency Economics”
“Inflation is the process whereby the government causes higher prices by creating more money either directly through deficit spending, or indirectly by lowering interest rates or otherwise encouraging borrowing. For example, when a shortage of goods and services causes higher prices, a government may attempt to help its constituents to buy more by giving them more money. Of course, a shortage means that the desired products don’t exist. More money just raises the price. When that, in turn, causes the government to further increase the money available, an inflationary spiral has been created. The institutionalization of this process is called indexing.”
I wonder what Mosler is up to by re-re-defining the word…….. huh LK?
lol.. and I said that the word “inflation” has been used in BOTH senses from the time it was first used in an economic sense.
Thanks for proving my point.
Mosler begins with, “Inflation is…………”
not “inflation of xyz is”
Do we know what words are used in French and/or German that mean “inflation” in any and all of its manifestations? And when and how they were first used? Do we care?
Bob Murphy,
“What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates.”
(Mises, ‘Human Action’)
Mises is referring to inflation here as a ‘great’ increase in the supply of money, which implies that a non-great increase, or small increase, would not be inflation according to him.
And in fact, further reading of Human Action clearly shows that Mises does use the same definition of inflation in it as he uses in the Theory of Money and Credit, namely: an increase in the supply of money in excess of the demand for money (i.e. not ‘offset’ by an increase in the demand for money, resulting in the reduced purchasing power of money (i.e. a rise in prices).
In the paragraphs just before the one you quote, Mises refers to inflation as “cash-induced changes resulting in a drop in purchasing power” and as “cash-induced changes in purchasing power”:
“The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They impIied the popular fallacy that there is such a thing as neutral money or money of stabIe purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.
However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power. Since the question as to at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeoIogical, economic, and catallactic concepts. Their application is appropriate for history and politics. Catallactics is free to resort to them only when applying its theorems to the interpretation of events of economic history and of political programs. Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misinterpretation can possibly result and pedantic heaviness of expression can be avoided. But it is necessary never to forget that all that catallactics says with regard to inflation and deflation – i.e., big cash-induced changes in purchasing power – is valid also with regard to small changes, although, of course, the consequences of smaller changes are less conspicuous than those of big changes.
The terms inflationism and deflationism, inflationist and deflationist, signify the poIitical programs aiming at inflation and deflation in the sense of big cash-induced changes in purchasing power.” p.419-420
(Just to be clear, by “a drop in purchasing power”, he does mean a rise in prices – see pages 423-424)
So, inflation is a “cash induced change” in the purchasing power of money, according to Mises.
He explains in more detail what he means by this in the previous section of Human Action:
“Changes in the purchasing power of money, i.e., in the exchange ratio between money and the vendible goods and commodities, can originate either from the side of money or from the side of the vendible goods and commodities. The change in the data which provokes them can either occur in the demand for and supply of money or in the demand for and supply of the other goods and services. We may
accordingly distinguish between cash-induced and goods-induced changes in purchasing power.” p.416
So according to Mises, a “goods-induced change in purchasing power” is not inflation, only a “cash-induced change” is.
And, he explains:
“The purchasing power of money is determined by demand and supply, as is the case with the prices of all vendible goods and services.” p.407
“The relation between the demand for money and the supply of money, which may be called the money reiation, determines the height of purchasing power. Today’s money relation, as it is shaped on the ground of yesterday’s purchasing power, determines today’s purchasing power. He who wants to increase his cash holding restricts his purchases and increases his sales and thus brings about a tendency toward falling prices. He who wants to reduce his cash holding increases his purchases – either for consumption or for production and investment – and restricts his sales; thus he brings about a tendency toward rising prices.” p.408
“Changes in the money relation are not onIy caused by governments issuing additional paper money. An increase in the production of the precious metals employed as money has the same effects although, of course, other classes of the population may be favored or hurt by it. Prices also rise in the same way if, without a corresponding reduction in the quantity of money available, the demand for money falls because of a general tendency toward a diminution of cash holdings. The money expended additionally by such a “dishoarding” brings about a tendency toward higher prices in the same way as that flowing from the gold mines or from the printing press. Conversely, prices drop when the supply of money falls (e.g., through a withdrawal of paper money) or the demand for money increases (e.g., through a tendency toward “hoarding,” the keeping of greater cash balances).” p.410
“As against this reasoning one must first of all observe that within a progressing economy in which population figures are increasing and the division of labor and its corollary, industrial specialization,
are perfected, there prevaiis a tendency toward an increase in the demand for money. Additional people appear on the scene and want to establish cash holdings. The extent of economic self-sufficiency, i.e., of production for the household’s own needs, shrinks and people become more dependent upon the market; this will, by and large, impel them to increase their holding of cash. Thus the price-raising tendency emanating from what is called the “normal” gold production encounters a price-cutting tendency emanating from the increased demand for cash holding.” p.411
And:
“the purchasing power handed down from the immediate past is modified by today’s demand for and supply of money”. p.423
“It is asserted that mankind would not have reached its present state of well-being if the supply of money had not increased to a greater extent than the demand for money. The resulting fall in purchasing power, it is said, was a necessary condition of economic progress.” p.463
So, if an increase in the supply of money is ‘offset’ by an equal increase in the demand for money, there is no reduction in the purchasing power of money, and thus there is no inflation, according to Mises. As such, inflation is not ‘an increase in the supply of money’, but an ‘increase in the supply of money in excess of the demand for money, resulting in a reduction purchasing power (a rise in prices)’.
According to this definition however, if there is no rise in prices, then there is no inflation.
Mises simply assumes that a very large increase in the supply of money will necessarily exceed the demand for money, leading to a rise in prices, and thus constituting inflation. This is what leads him to refer to inflation as “the great increase or decrease in the supply of money” in the quote you posted.
However, this is just an assumption, or an assertion, which may turn out to be incorrect. The only way we can actually know whether inflation has occurred, according to Mises’ definition, is if there is a rise in prices. This suggests that an increase in the supply of money has exceeded the demand for money.
However, as Mises himself points out, a rise in prices, or fall in purchasing power, may be caused by other factors – not just an increase in the supply of money over and above the demand for money. Which means that we can’t actually know whether a rise in prices has been caused by an increase in the supply of money in excess of the demand for money – unless we know what the demand for money is.
*the last bit wasn’t meant to be all in italics.
Philippe:
“As such, inflation is not ‘an increase in the supply of money’, but an ‘increase in the supply of money in excess of the demand for money, resulting in a reduction purchasing power (a rise in prices)’.”
No. A reduction of purchasing power does NOT necessarily imply a rise in prices. They don’t mean the same thing. You are claiming Mises defined inflation as requiring a rise in prices, i.e. inflation is a rise in prices plus a bunch of other stuff. But Mises repeatedly said he doesn’t like that definition.
Mises is referring to additional money in circulation when he talks about declines in purchasing power.
A lower purchasing power just means that dollars don’t buy as much as they otherwise would. That does not necessarily mean higher prices, because production may be such that the additional money in circulation is matched by an increase in supply such that prices do not rise.
Your first point on what “great” allegedly implies is refuted by, ironically enough, a quote you just posted:
“But it is necessary never to forget that all that catallactics says with regard to inflation and deflation – i.e., big cash-induced changes in purchasing power – is valid also with regard to small changes”
In other words, Mises regards “small increases in money supply” as inflation as well, which conclusively contradicts your thesis.
Sorry,
“A lower purchasing power just means that dollars don’t buy as much as they otherwise would.”
Should read
“A lower purchasing power just means that a given dollar doesn’t buy as much as it otherwise would.”
“In other words, Mises regards “small increases in money supply” as inflation as well, which conclusively contradicts your thesis.”
No, that’s clearly not what he is saying.
He says inflation is a “cash induced change in purchasing power”. And then he says it is not necessarily just a ‘big’ change in purchasing power, it can just as easily be a small change in purchasing power.
And an increase in the supply of money does not necessarily result in a reduction in purchasing power – either big or small – if it does not exceed the demand for money.
I corrected myself already.
But my latest post with the long quote of Mises shows what’s what.
Sorry again, I misread that bolded part. My bad.
Philippe:
This is the important part:
“The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.
“However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power. Since the question at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeological, economic, and catallactic concepts. Their application is appropriate
for history and politics. Catallactics is free to resort to them only when applying its theorems to the interpretation of events of economic history and of political programs. Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misinterpretation can possibly result and pedantic heaviness of expression can be avoided. But it is necessary never to forget that all that catallactics says with regard to inflation and deflation—i.e., big cash-induced changes in purchasing power—is valid also with regard to small changes, although, of course, the consequences of
smaller changes are less conspicuous than those of big changes.
“The terms inflationism and deflationism, inflationist and deflationist, signify the political programs aiming at inflation and deflation in the sense of big cash-induced changes in purchasing power. The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer
the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.”
That last paragraph shows that what you said is Mises’ definition, i.e. “big cash-induced changes in purchasing power”, is actually what Mises says is the political definition that he regrets. He regrets that inflation no longer means the increase in money supply, but the consquences, i.e. the fall in purchasing power, and rising prices.
These sentences:
“From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.”
“However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. ”
Recall when you said that because Mises used the word “Great” above, that this somehow implies Mises would then define a “small” increase in money supply as not inflation. Well, these passages show that the political definition that arose, the one you attribute to Mises as his definition about changes in purchasing power, Mises actually believed that purchasing power changes would imply that there is ALWAYS inflation or deflation going on.
But he doesn’t define inflation as relating to purchasing power. That is his reference to the political definition. He, like Murphy alluded to, was uncomfortable even writing that definition of inflation.
Mises wanted to distinguish the money supply related definition of inflation from the price related definition of inflation. Surely you cannot possibly believe that Mises preferred the definition that implied rising prices (in your view).
Also notice that he said “those applying these terms”.
If Mises also defined it that way, then he would have said “We who apply these terms” or something like that.
Philippe, is it possible that all those purchasing power definitions Mises wrote about, that you thought were his definitions, were really just Mises referring to the political ones of which he didn’t approve, like, the whole time in the entirety of his writings, dating back to at least Theory of Money and Credit?
“Surely you cannot possibly believe that Mises preferred the definition that implied rising prices”
That’s how he defines it in the Theory of Money and Credit and in Human Action. Recall the Theory of Money and Credit definition:
“an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.”
A fall in “the objective exchange value of money” means a fall in purchasing power.
Keep quoting…
“If we so define these concepts, it follows that either inflation or deflation is constantly going on”
In other words, if we go back to Human Action, and the “big” increases in money, it means that even “small” increases in money can be inflation, if the demand for money holding increases by a smaller amount.
And more:
“But once the economist has acknowledged that it is not entirely nonsensical
to use the expressions Inflation and Deflation to indicate such
variations in the quantity of money as evoke big changes in the objective
exchange-value of money, he must renounce the employment of these
expressions in pure theory. For the point at which a change in the exchange-
ratio begins to deserve to be called big is a question for political
judgement, not for scientific investigation.”
yes, so he’s saying inflation doesn’t just mean a “big” cash-induced change in purchasing power, it can also mean a “small” cash-induced change in purchasing power.
So, for something to be called inflation, according to Mises, you have to have:
1. an increase in the supply of money
2. that is not matched by an equal increase in the demand for money
3. resulting in rising prices.
as I said, according to Mises definition, the only way you can really know whether an increase in the supply of money is greater than the demand for money, is if there is a rise in prices. If they don’t, then the increased money supply must have been matched by increased money demand, so there is no inflation.
However Mises assumed that increases in money demand were relatively small, so he assumed that very large increases in money would exceed the demand for money, and result in rising prices, thus qualifying as inflation.
*if there isn’t, not if they don’t
Philippe:
Mises did not prefer that definition. It is why he wrote:
“From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.”
“However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. ”
There are, according to Mises, ALWAYS inflation and deflation if this “semantic shift” definition is used, because the change in the money supply is never exactly matched by an offsetting money holding. No matter how big or small the change in supply of money, it is not possible in a world of change and uncertainty for stable purchasing power to be had.
He didn’t say that inflation is ONLY “big” changes in the money supply. He was just referring to history.
The definition he is writing about that speaks of changes in falling purchasing power he referred to as defined by “those”, i.e. not himself.
He said those who define inflation as cash induced fall in purchasing power are “not aware” of something.
Surely he had a different understanding of inflation than those he is purposefully distancing himself from who defined it as what you are asserting was Misea’ definition.
Even that passage in Theory of Money and Credit that you keep posting, says right after that this would imply there is always inflation and deflation, because changes in money supply is never exactly matched by offsetting changes in hoarding money.
‘The definition he is writing about that speaks of changes in falling purchasing power he referred to as defined by “those”, i.e. not himself.”
He is talking about the traditional defintion of inflation. As he says, the term was not invented by economists:
The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They impIied the popular fallacy that there is such a thing as neutral money or money of stabIe purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.”
“He said those who define inflation as cash induced fall in purchasing power are “not aware” of something.”
All he says is that they usually only refer to “big” cash-induced changes in purchasing power as inflation. However, he says that the term also applies to small changes, as purchasing power is never completely stable.
It’s so obvious that you are wrong here.
Philippe:
Your claims are falling one by one and you’re saying I’m wrong? That is rich.
“He is talking about the traditional defintion of inflation. As he says, the term was not invented by economists.
No, that definition he is referring to is what he called a “semantic shift.”.
If the definition “shifted” then it is inaccurate to say Mises regarded it as the “traditional” definition.
“All he says is that they usually only refer to “big” cash-induced changes in purchasing power as inflation. However, he says that the term also applies to small changes, as purchasing power is never completely stable.”
Which contradicts your earlier claim that Mises called inflation only those “Great” increases in money supply.
Mises did not like the semantic shift in definition towards cash induced “fall in purchasing power” because it would mean there is always inflation and deflation, meaning no matter how small the change in money, there will be inflstion or deflation as defined by the shifted one.
No, that definition he is referring to is what he called a “semantic shift.”
At no point does he refer to ‘cash-induced change in purchasing power’ as a “semantic shift”. He keeps using the term cash-induced change in purchasing power throughout Human Action. He clearly doesn’t have a problem with the term, as he keeps using it everywhere.
“Which contradicts your earlier claim that Mises called inflation only those “Great” increases in money supply.”
No it doesn’t. There is a difference between a ‘great increase in the supply of money’ and ‘a big cash-induced change in purchasing power’.
Say there is a small increase in the money supply, and no increase in the demand for money. According to Mises, this results in a small fall in purchasing power and is inflation.
However if there is a small increase in the money supply, matched by an equal increase in the demand for money, this doesn’t result in a fall in purchasing power and is not inflation according to Mises.
After all this discussion, I think I am going to change the definition of inflation and deflation I use from now on. Mises is right, it is too political. There is no way to define it without being political.
So, I will start defining them in such a way that they would not exist in a stateless world.
I now define inflation as the increase in supply of money greater than what it otherwise would be in a stateless world.
Just like we quibble less over whether there are too many” or “too few” potatoes or pizzas or cars, as they are more privately controlled with many “independent from each other” producers, so too can it be with money.
Philippe:
“At no point does he refer to ‘cash-induced change in purchasing power’ as a “semantic shift”.”
He does so here:
“The terms inflationism and deflationism, inflationist and deflationist, signify the political programs aiming at inflation and deflation in the sense of big cash-induced changes in purchasing power. The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences”.
One such inexorable consequence is fall in purchasing power, which is the same thing, as Mises defined it, as a rise in prices.
Philippe:
“Which contradicts your earlier claim that Mises called inflation only those “Great” increases in money supply.”
“No it doesn’t. There is a difference between a ‘great increase in the supply of money’ and ‘a big cash-induced change in purchasing power’.”
But you said that by “great” increase in money supply, Mises meant an increase that results in a changed purchasing power because the demand for money doesn’t rise enough.
Say there is a small increase in the money supply, and no increase in the demand for money. According to Mises, this results in a small fall in purchasing power and is inflation.
However if there is a small increase in the money supply, matched by an equal increase in the demand for money, this doesn’t result in a fall in purchasing power and is not inflation according to Mises.
“Say there is a small increase in the money supply, and no increase in the demand for money. According to Mises, this results in a small fall in purchasing power and is inflation.”
And what if production falls somewhat such that prices don’t rise even though the increase in money supply was met with a smaller increase in money demand?
Mises wol
However if there is a small increase in the money supply, matched by an equal increase in the demand for money, this doesn’t result in a fall in purchasing power and is not inflation according to Mises.
he’s obviously not referring to the passage above. He’s referring to the ‘new fangled’ definition of inflation as simply ‘a rise in prices’.
As I said, there is a difference between defining inflation as ‘a rise in prices’ and defining it as ‘a cash-induced change in purchasing power’. The former makes no mention of a cause, whereas the latter includes a specific cause.
Above the bit you quote, he is clear that ‘cash-induced change in purchasing power’ is not a ‘new fangled’ and incorrect definition, but one which can be used by ‘catallactics’:
“Catallactics is free to resort to [the terms inflation and deflation] only when applying its theorems to the interpretation of events of economic history and of political programs. Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misinterpretation can possibly result and pedantic heaviness of expression can be avoided. But it is necessary never to forget that all that catallactics says with regard to inflation and deflation-i.e., big cash-induced changes in purchasing power-is valid also with regard to small changes, although, of course, the consequences of smaller changes are less conspicuous than those of big changes.” p.420
Philippe:
Again that meaning of inflation is what Mises did not like, but applied catallactic reasoning to it anyway.
Mises wrote just before:
“The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation—the rise in prices—are disguising their endeavors as a fight against inflation.”
Mises separates inflation FROM rising prices.
You cannot assert that Mises defined inflation as
1. Increase in money supply
2. Demand increases by less, purchasing power falls
3. Rising prices.
You can’t attribute that three part definition to someone who prefers inflation to be defined as that which causes 3., not include 3. in the definition.
It makes no sense to say that someone who says inflation causes prices to increase, is someone who believes inflation is even in part a concept that includes rising prices.
Right. Good point
““an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.””
The idea of rising prices is entailed by Mises’ definition of inflation here.
If prices rose because of no change in money, but rather a drop in production such that fewer goods are sold for higher prices, then despite the rise in prices, it would not be inflation even according to the definition Mises referred to.
Mises lamented the fact that the definition switched away from the cause, the increase in money supply, to the effect, the fall in purchasing power and rising prices.
the problem is, according to Mises’ definition, you can’t actually know whether there has been inflation unless there has been a rise in prices. If the quantity of money increases, and the demand for money increases by the same amount, then by Mises’ definition there is no cash-induced fall in purchasing power and thus no inflation. Only if the supply exceeds demand, resulting in rising prices, is it inflation, according to Mises.
Philippe:
That isn’t Mises’ definition. That is the definition he attributed to “those” other people, and critiqued it precisely because it is a definition that rests on the effects which is increased prices.
See again here:
“From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.
“However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power.”
Mises is saying that “this point of view” is not his point of view.
You and LK are attributing to Mises a definition that he was in fact criticizing and not in agreement with.
you are so obviously wrong it’s funny.
We already know that Mises precisely defined inflation in the Theory of Money and Credit:
““an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.””
According to this definition, if there is an increase in the supply of money which is offset by an equal increase in the demand for money, there will be no fall in the objective exchange value (purchasing power) of money, and it will not qualify as inflation.
By this definition, you can only really know if there has been inflation if there is a rise in prices, (unless you somehow knew exactly what the demand for money was in advance)
You have a funny way of interpreting my many exposures of flaws in your claims.
Philippe:
“We already know that Mises precisely defined inflation in the Theory of Money and Credit:”
We already know he critiqued that definition in Human Action.
The reason why he prefaced that definition with “the only rational meaning” is to connect the definition of rising prices to the cause. He was explaining the cause for historical rising prices. Increase in money supply that isn’t matched by money hoarding.
That does not mean that this is Mises’ own definition. He is against the whole concept. He saw inflation as a cause, not the effect.
He distinguished inflation from rising prices. That means Mises understood inflation not as including fall in purchading power.
The definition you keep citing from TOM is not Mises’ definition. A few sentences later he says that this definition implies there is always inflation or deflation no matter what happens to the money supply. This is a criticism, not an explication of his acceptance of it.
“According to this definition, if there is an increase in the supply of money which is offset by an equal increase in the demand for money, there will be no fall in the objective exchange value (purchasing power) of money, and it will not qualify as inflation.
By this definition, you can only really know if there has been inflation if there is a rise in prices, (unless you somehow knew exactly what the demand for money was in advance)”
That is a definition he critiqued.
Other passages in TOMC that more clearly show us Mises’ own views:
“Inflationism is that monetary policy that seeks to increase the quantity of money.”
(no mention of increasing the quantity of money greater than demand for money).
“Other inflationists realize very well that an increase in the quantity of money reduces the purchasing power of the monetary unit. But they endeavour to secure inflation nonetheless, because of its effect on the value of money”
(Notice Mises distinguishes inflation on the one hand, from purchasing power on the other, which clearly and obviously suggests that MISES regards inflation as a CAUSE for declines in purchasing power, rather than being an increase in money supply AND an insufficient demand for money such that the effects of inflation are observed. You keep saying Mises’ definition of inflation requires us to first learn what the effects are, i.e. prices. But he is clearly separating inflation as he understood it from the resulting value of money, i.e. the purchasing power.
“If inflationary measures and a reduction of the value of money are expected, then those who lend money will demand higher interest in order to compensate their probable loss of capital, and those who seek loans will be prepared to pay the higher interest because they have a prospect of gaining on capital account.”
(Here Mises is quite clearly implying that inflation alone does not necessarily reduce the (exchange) value of money. He is saying inflation AND declines in value have to be present. That suggests Mises likes to keep inflation as a concept separate from the effect on exchange value. He isn’t saying inflation will lead lenders to demand a higher rate. He is saying inflation AND a fall in purchasing power will.
the point is that according to Mises definition of inflation as ‘an increase in the supply of money not offset by an increase in demand for money’, you can only really know whether inflation has occurred if there has been a rise in prices (or fall in the purchasing power of money).
Mises assumes that increases in the demand for money will not be very large, which leads him to assert that very large increases in the supply of money will necessarily exceed the demand for money and lead to falling purchasing power.
However, it could be that his assumption is wrong, or not always correct, and that large changes in money supply could be accompanied by large increases in money demand. We can only really know for certain, according to Mises definition, if there has been a rise in prices.
Milton Friedman made a similar assumption when he assumed that demand for money did not change. Modern neo-monetarists or market monetarists specifically reject this assumption as being incorrect.
Philippe:
“the point is that according to Mises definition of inflation as ‘an increase in the supply of money not offset by an increase in demand for money’, you can only really know whether inflation has occurred if there has been a rise in prices (or fall in the purchasing power of money).”
No, that does not follow. A rise in the supply of money and fall in purchasing power does not mean prices rise. Prices could be the same, or lower, while a given dollar does not buy as much as it otherwise would have.
“Mises assumes that increases in the demand for money will not be very large, which leads him to assert that very large increases in the supply of money will necessarily exceed the demand for money and lead to falling purchasing power.”
Yes.
“However, it could be that his assumption is wrong, or not always correct, and that large changes in money supply could be accompanied by large increases in money demand. We can only really know for certain, according to Mises definition, if there has been a rise in prices.”
No, we can only know if spending rises.
“Milton Friedman made a similar assumption when he assumed that demand for money did not change. Modern neo-monetarists or market monetarists specifically reject this assumption as being incorrect.”
So do Austrians. Austrian theory does not predict any constant “velocity”.
“That last paragraph shows that what you said is Mises’ definition, i.e. “big cash-induced changes in purchasing power”, is actually what Mises says is the political definition that he regrets.”
No, that’s obviously wrong.
Mises regrets the use of the word inflation to just mean ‘a rise in prices’. That is not the same as “a cash-induced drop in purchasing power”.
Mises then goes on to continuously use “cash induced change in purchasing power” to mean inflation throughout the following sections.
And in the section you quote:
“Catallacticsis free to resort to [the terms inflation and deflation] only when applying its theorems to the interpretation of events of economic history and of political programs. Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misinterpretation can possibly result and pedantic heaviness of expression can be avoided. But it is necessary never to forget that all that catallactics says with regard to inflation and deflation-i.e., big cash-induced changes in purchasing power-is valid also with regard to small changes, although, of course, the consequences of smaller changes are less conspicuous than those of big changes.” p.420
“Mises regrets the use of the word inflation to just mean ‘a rise in prices’. That is not the same as “a cash-induced drop in purchasing power”.”
That can’t be right.
You just said below that Mises believed that:
“If the purchasing power of a dollar goes down, this means that one dollar buys less goods than it used to. In other words, the price of goods in terms of dollars goes up.”
How can you say rise in prices is not the same thing as fall in purchasing power, when just previously you said fall in purchasing power is rising prices?
I didn’t say that “a rise in prices is not the same thing as fall in purchasing power”.
I said there is a difference between these two defintions of inflation:
1. A rise in prices
2. a cash-induced drop in purchasing power.
The first definition makes no mention of a cause.
But you denied my statement that a fall in purchasing power may not be associated with rising prices.
If it is impossible for fall in purchasing power to not be associated with rising prices, then you are saying that saying one is saying the other, i.e. that they mean the same thing.
no, they do not mean the same thing. The first definition says nothing about what caused the rise in prices.
The second defintion is “a rise in prices caused by too much money”
But it isn’t even a “cause and effect” relationship the way you argued it. The only meaning you are associating with “fall in purchasing power” IS “rising prices.”
“a cash-induced change in purchasing power”
is not the same as
“a change in purchasing power”
Can you see the difference?
But you said that inflation is defined by Mises as only a cash induced change.
Not just a change that might be caused by supply changes.
Yes, I agree that there can be causes for rising prices other than inflation.
Philippe:
You keep attributing to Mises that he defined of inflation as including “fall in purchasing power”, when he specifically said:
“The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.”
See that? He’s saying “from this point of view”. It wasn’t HIS view.
More:
“However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation.”
Here is saying that those who define inflation as including fall in purchasing power, are not aware that purchasing power never remains the same, and so the meaning of inflation and deflation would become vacuous, since there is always changes to purchasing power.
Mises doesn’t like “purchasing power” being included in the definition. He prefers the definition as one that does not refer to the rise in prices. That means his preferred definition is not one that includes fall in purchasing power, for including fall in purchasing power means rising prices. Mises did not like the definition to refer to rising prices.
No, Mises goes on to say:
“Since the question as to at what point a change in purchasing power begins to deserve being called big depends on personal relevance judgments, it becomes manifest that inflation and deflation are terms lacking the categorial precision required for praxeoIogical, economic, and catallactic concepts. Their application is appropriate for history and politics. Catallactics is free to resort to them only when applying its theorems to the interpretation of events of economic history and of political programs. Moreover, it is very expedient even in rigid catallactic disquisitions to make use of these two terms whenever no misinterpretation can possibly result and pedantic heaviness of expression can be avoided. But it is necessary never to forget that all that catallactics says with regard to inflation and deflation-i.e., big cash-induced changes in purchasing power-is valid also with regard to small changes, although, of course, the consequences of smaller changes are less conspicuous than those of big changes.” p.420
That isn’t Mises definition of inflation. He is referring to the political concept and saying that what catallactics says about big changes, applies to small changes.
That is not Mises saying “I define inflation as big cash induced changes to purchasing power.”
can’t you read?:
“all that catallactics says with regard to inflation and deflation-i.e., big cash-induced changes in purchasing power-is valid also with regard to small changes”
all he’s saying is that people normally only refer to “big” cash-induced changes in purchasing power as inflation, whereas the term applies equally well to small cash-induced changes in purchasing power.
I can read, but it seems you are selective in your reading.
That definition is what Mises refers to as political.
I can’t believe you are being serious.
Not only does Mises constantly use ‘cash-induced change in purchasing power’ to refer to inflation in subsequent sections, but in the section we are discussing it is totally obvious what he means. And it is in accordance with his definition of inflation in the Theory of Money and Credit.
In the section we are discussing he begins by talking about how people usually defined inflation. He is talking about the past, he says this is the definition which came out of ordinary language. He then says that catallactics can use this definition but only for historical and policy studies, etc, and that the term inflation can also apply to small cash-induced changes in purchasing power. He then says:
“The terms inflationism and deflationism, inflationist and deflationist, signify the poIitical programs aiming at inflation and deflation in the sense of big cash-induced changes in purchasing power.”
And then he goes on to talk about current popular usage of the term inflation to mean only ‘a rise in prices’, which leaves out any mention of the cause.
Mises was referring to other people’s definition of inflation. It isn’t his?
Yes he constantly refers to inflation, yes he often included, but not always, fall in purchasing power.
But he regrets that definition. He said that by the semantic switch, inflation and deflation defined that way implies there is ALWAYS inflation and deflation going on.
Now surely, if you are going to attribute to Mises a definition he regarded as political, and used by “those” people, and a semantic shift away from the cause, then sorry Philippe, but it is you who is saying stuff that can be replied with “I can’t believe he’s serious.”
“A reduction of purchasing power does NOT necessarily imply a rise in prices. They don’t mean the same thing.”
‘Purchasing power’ means the number of goods or services that can be purchased with a unit of currency, or as Mises says:
“The vaIue in exchange (purchasing power)” p.405
“Changes in the purchasing power of money, i.e., in the exchange ratio between money and the vendible goods and commodities.” p.416
If the purchasing power of a dollar goes down, this means that one dollar buys less goods than it used to. In other words, the price of goods in terms of dollars goes up.
Mises:
“As with every other economic good, such an additional demand [for money] brings about a rise in its value in exchange, i.e., in the quantity of other goods which are offered for its acquisition. The amount of other goods which can be obtained in giving away a medium of exchange, its “price” as expressed in terms of various goods and services, is in part determined by the demand of those who want to acquire it as a medium of exchange. If people stop using the good in question as a medium of exchange, this additional specific demand disappears and the “price” drops concomitantly.
Thus the dernand for a medium of exchange is the composite of two partial demands: the demand displayed by the intention to use it in consumption and production and that displayed by the intention to use it as a medium of exchange. With regard to modern metalIic money one speaks of the industrial demand and of the monetary demand. The vaIue in exchange (purchasing power) of a medium of exchange is the resultant of the cumulative effect of both partial demands.” p.405
If a dollar today buys the same amount of goods as a dollar yesterday then there has been no change in its purchasing power. In other words, if there has been no increase in prices then there has been no change in its purchasing power.
It’s obvious that this is precisely what Mises means by ‘a change in purchasing power’, as that’s what ‘a change in purchasing power’ means.
See pages 423-424 for example:
“The deliberations of the individuals which determine their conduct with regard to money are based on their knowledge concerning the prices of the immediate past. If they lacked this knowledge, they would not be in a position to decide what the appropriate height of their cash holdings should be and how much they should spend for the acquisition of various goods. A medium of exchange without a past is unthinkable. Nothing can enter into the function of a medium of exchange which was not already previously an economic good and to which people assigned exchange value already before it was demanded as such a medium.
But the purchasing power handed down from the immediate past is modified by today’s demand for and supply of money. Human action is always providing for the future, be it sometimes only the future of the impending hour. He who buys, buys for future consumption and production. As far as he believes that the future will differ from the present and the past, he modifies his valuation and appraisement. This is no less true with regard to money than it is with regard to all vendible goods. In this sense we may say that today’s exchange value of money is an anticipation of tomorrow’s exchange vaIue. The basis of all judgments concerning money is its purchasing power as it was in the immediate past. But as far as cash- induced changes in purchasing power are expected, a second factor enters the scene, the anticipation of these changes. He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief; accordingly he restricts his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding. As long as such speculative anticipations are limited to some commodities, they do not bring about a general tendency toward changes in cash holding. But it is different if people believe that they are on the eve of big cash-induced changes in purchasing power. When they expect that the money prices of all goods will rise or fall, they expand or restrict their purchases. These attitudes strengthen and accelerate the expected tendencies considerably. This goes on until the point is reached beyond which no further changes in the purchasing power of money are expected. Only then does the inclination to buy or to sell stop and do people begin again to increase or to decrease their cash holdings. But if once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progrossive fall in purchasing power.” p.423-4
Well sure, but from before the context was whether an increase in the supply of money is accompanied with, or followed by, an equivalent increase in money holding. The argument then was that if the demand for money holding doesn’t equivalently rise, then more dollars will be in circulation. This is what I believed you meant by “fall in purchasing power” at the time, because you were associating this to Mises’ beliefs, but since I knew he didn’t like the rise in prices definition of inflation, I couldn’t connect “fall in purchasing power” with “rising prices.”
I was only saying that more dollars in circulation does not necessarily mean rising prices.
do you agree that a fall in purchasing power means a rise in prices?
If fall in purchasing power means more dollars chasing fewer goods, then yes.
Do you agree that this statement by Mises:
“From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power.”
Is not his view, given that immediately prior, he wrote that:
“The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power.”
?
Mises regarded inflation as a political concept, not an economic one. He regrets that the meaning of inflation changed over time, away from changes in money supply to its effects, i.e. fall in purchasing power, and rising prices.
“If fall in purchasing power means more dollars chasing fewer goods, then yes.”
It doesn’t only mean that. It simply means that a unit of currency (one dollar) buys less goods than it used to.
Regarding the rest of your comment:
http://consultingbyrpm.com/blog/2014/07/on-mises-use-of-the-term-inflation.html#comment-745933
“It doesn’t only mean that. It simply means that a unit of currency (one dollar) buys less goods than it used to.”
Those mean the same thing.
yours is more specific, as you mention an increase in dollars.
Saying the same thing in a different way does not add any specificity. If something is more specific, then the two statements do not mean the same thing. One has “more” of something than the other.
it is possible for the purchasing power of a dollar to fall without there being an increase in the number of dollars.
Yes.
Mises referred to this when he wrote about a change in real goods (supply).
A question more relevant to what Mises wrote is this:
Is it reasonable to believe that any changes in the money supply, no matter how big or small, can be systematically and continually exactly offset by changes in money hoardinf and dishoarding, such that prices remain exactly stable?
I think you would agree: no.
Thus, as Mises explained, those who define inflation as cash induced fall in purchasinf power and deflation as cash induced rise in purchasing power, would have to admit that there is ALWAYS inflation and deflation going on.
The reason he made this point was to show the terms are political, not economic. For it means that people would have to arbitrarily define when inflation and deflation are “too big”.
“The reason he made this point”
All he’s saying is that inflation is not just “big” cash-induced changes in purchasing power, but also small changes, as the purchasing power of money is never completely stable.
Philippe:
No, he’s saying that other people’s definitions of inflation and deflation, i.e. these “cash-induced changes that result in rise or fall in purchasing power”, the definition he is critiquing, implies that.
no. as he says:
“all that catallactics says with regard to inflation and deflation-i.e., big cash-induced changes in purchasing power-is valid also with regard to small changes”
He mentions others because he says that the notion of inflation was not invented by him or by economists.
Philippe:
No, he’s saying that the definition not invented by him NOR ACCEPTED by him, when subjected to catallactic reasoning, leads to the awkward implication that there is always inflation and deflation.
He made that argument because he doesn’t prefer the definition of inflation you keep attributing to him.
… the consequences of smaller changes are less conspicuous than those of big changes.
What are the *consequences* of smaller changes?
Now, what are the “smaller changes”?
“No, he’s saying that the definition not invented by him NOR ACCEPTED by him, when subjected to catallactic reasoning, leads to the awkward implication that there is always inflation and deflation.”
He says that “big cash-induced changes in purchasing power” is too imprecise a definition of inflation, as the definition of ‘big’ “depends on personal relevance judgments”. So he says that use of the term inflation is also valid to describe small cash-induced changes in purchasing power, not just big changes.
“But it is necessary never to forget that all that catallactics says with regard to inflation and deflation-i.e., big
cash-induced changes in purchasing power-is valid also with regard to
small changes”
“the awkward implication that there is always inflation and deflation”
No, this is not the awkward implication of a definition he doesn’t accept. His definition of inflation leads him to conclude that there is always inflation and deflation going on.
To clarify:
“In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange value of money must occur. If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange value of money did not alter could hardly ever exist for very long.” (Theory of Money and Credit) p.440
your entire argument is ridiculous as Mises repeatedly uses ‘cash-induced changes in purchasing power’ in the place of ‘inflation’ throughout Human Action.
The problem he has with the term ‘inflation’ is that its popular usage is either imprecise or wrong, according to him.
It is imprecise when it refers only to ‘big’ cash-induced changes in purchasing power (as opposed to all cash-induced changes in purchasing power, even small ones), and it is wrong when it simply refers to ‘a rise in prices’ without any reference to a monetary cause.
So in many places in Human Action Mises simply writes “cash-induced change in purchasing power” instead of ‘inflation’.
Philippe:
“He says that “big cash-induced changes in purchasing power” is too imprecise a definition of inflation, as the definition of ‘big’ “depends on personal relevance judgments”. So he says that use of the term inflation is also valid to describe small cash-induced changes in purchasing power, not just big changes.”
“But it is necessary never to forget that all that catallactics says with regard to inflation and deflation-i.e., big
cash-induced changes in purchasing power-is valid also with regard to
small changes”
And?
“the awkward implication that there is always inflation and deflation”
“No, this is not the awkward implication of a definition he doesn’t accept. His definition of inflation leads him to conclude that there is always inflation and deflation going on.”
It is not “his” definition.
“Mises repeatedly uses ‘cash-induced changes in purchasing power’ in the place of ‘inflation’ throughout Human Action.”
This does not necessitate rising prices.
“The problem he has with the term ‘inflation’ is that its popular usage is either imprecise or wrong, according to him.”
It’s more. It is that the definition refers to the effect, not the cause.
“It is imprecise when it refers only to ‘big’ cash-induced changes in purchasing power (as opposed to all cash-induced changes in purchasing power, even small ones), and it is wrong when it simply refers to ‘a rise in prices’ without any reference to a monetary cause.”
Yes.
“So in many places in Human Action Mises simply writes “cash-induced change in purchasing power” instead of ‘inflation’.”
Yes.
I was only saying that more dollars in circulation does not necessarily mean rising prices.
To clarify: You would say that, all other things being equal, more dollars in circulation *does* necessarily result in rising prices?
Increased production accompanying an increased supply of money could cause prices to remain the same, or even drop?
Yrs
Ermagerd, I mrd a trpo
Mises:
“In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur. Again, Deflation (or Restriction, or Contraction) signifies: a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur. If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange-value of money did not alter could hardly ever exist for very long. The theoretical value of our definition is not in the least reduced by the fact that we are not able to measure the fluctuations in the objective exchange-value of money, or even by the fact that we are not able to discern them at all except when they are large” (Mises 1953).
He tells us explicitly that “only one meaning that can rationally be attached to the expression Inflation”. Maybe he changed his mind, but that doesn’t change the fact that he defined it in this way here.
You’re too late. Already dealt with.
If that is how Mises defined inflation, then it would suggest that if prices don’t rise, then there is no inflation, and if prices don’t fall, then there is no deflation. That is, inflation and deflation would be exactly the “semantic revolution” definitions he criticized.
Are you denying that Mises defined inflation as “an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings”?
http://www.fee.org/publications/detail/the-free-market-and-its-enemies#axzz2mXfFRfH7
Yes or no?
I’m not interested in your red herrings, straw man arguments, or unhinged redefinitions of every term you don’t like.
Your interpretation of those words is wrong.
From the paper Bob Murphy cites by Cachanosky, N., 2009, “The Definition of Inflation According to Mises: Implications for the Debate on Free Banking,” Libertarian Papers Vol. 1, Art. No. 43: p. 5:
“Mises …. suggests inflation [is] … ‘an increase in the quantity of money above the market demand of money.’ Note that, under Mises’ suggested definition, not every increase in the quantity of money is inflation, only increases that exceed market demand …. [Mises] saves the term inflation for cases where the quantity of money is increasing above the market demand for money” (Cachanosky 2009: 5).
————————-
Cachanosky even cites Mises’ statement in The Free Market and Its Enemies (1952 [2004]), p. 44, made in 1952:
“Inflation is an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings.”
http://www.fee.org/publications/detail/the-free-market-and-its-enemies#axzz2mXfFRfH7
lol. Did Murphy even read the paper properly?
I consider the phrase “market demand of money” to be vague, but probably as clear as conciseness will allow.
The Austrian position being that money emerges out of barter, it logically follows that “money” that is in excess of the goods it represents (which can only happen with money substitutes; thus the use of quotation marks for “money”) is what the Austrians consider “above the market demand for money”.
(Aside: Some Austrians will object to this for a particular reason, but I don’t want to be accused of going on a tangent, so I will address that objection when it’s presented.)
Inflation, by the definition used here, can’t happen under commodity money or 100% reserve banking: The value of money is based on people’s subjective values of the goods for which it buys and sells, so the prices that would result from any changes in commodity money are exactly what people want money to do – it lets them know something real about consumer preferences.
“Inflation, by the definition used here, can’t happen under commodity money or 100% reserve banking”
I’m not sure that’s true:
“Changes in the money relation are not onIy caused by governments issuing additional paper money. An increase in the production of the precious metals employed as money has the same effects although, of course, other classes of the population may be favored or hurt by it. Prices also rise in the same way if, without a corresponding reduction in the quantity of money available, the demand for money falls because of a general tendency toward a diminution of cash holdings. The money expended additionally by such a “dishoarding” brings about a tendency toward higher prices in the same way as that flowing from the gold mines or from the printing press. Conversely, prices drop when the supply of money falls (e.g., through a withdrawal of paper money) or the demand for money increases (e.g., through a tendency toward “hoarding,” the keeping of greater cash balances).”
Human Action, p.410
An increase in the production of the precious metals employed as money has the same effects although, of course, other classes of the population may be favored or hurt by it.
I’m going to be careful here, because the Mises quote deals with a slightly different concept than am I.
The difference is that the inflation that I was talking about is fraud, whereas, the inflation that Mises is talking about is not.
The inflation that Austrians would (should?) say causes the business cycle is an increase of money substitutes over that which they are claimed to represent.
That’s fraud because the function of money is to, in a sense, carry our subjective valuations (for the goods that are sold for it) to the goods we buy, such that we can determine whether or not we made a profit (more money units don’t necessarily mean more wealth).
Inflation of a commodity-money supply does cause the purchasing power of holders of older units to lose purchasing power, but this is in accordance with consumer preferences.
In this case, the rise in commodity-money prices is exactly what we want money to do: When the supply of something increases (all other things being equal), the value is *supposed* to go down (i.e., it takes more units to buy the same things).
This is important information about consumer preferences. For example, now that I know that there’s more of a commodity, I can modify my production processes to account for lower demand for it.
So, when I say that inflation can’t happen under commodity money, I’m talking about the kind that distorts information about consumer preferences. That’s the kind of inflation that causes the business cycle.
“The difference is that the inflation that I was talking about is fraud…
That’s fraud because the function of money is to…”
Hang on. The definition of fraud does not depend upon your beliefs about what the ‘function’ of money is, or should be.
Fraud is usually defined as:
“Wrongful or criminal deception intended to result in financial or personal gain”
I don’t see how the issuance of fiat or credit money fits that description.
Then let me pay you with paper that I write numbers on, which does not guarantee redemption in anything in particular.
ok, if I was to accept your piece of paper in payment, and I knew that it couldn’t necessarily be redeemed for, say, a specific quantity of metal, why would that be fraud?
I’m pretty certain it wouldn’t be.
Because you expect it to mean something (whether it’s a precious metal, or something else that has a use-value), when it does not.
To say otherwise would be to claim that you are trading for trading’s sake, and you don’t need money in order to do that.
Why are you accepting my paper in trade?
The answer of “Because someone else will accept it” is not sufficient since that just adds a step (“Why does *that* guy accept it?”).
“Because you expect it to mean something (whether it’s a precious metal, or something else that has a use-value), when it does not.”
So why do people buy Bitcoin, for example? Bitcoin can not be redeemed for a specific quantity of metal.
A dollar can’t be redeemed for a specific quantity of metal either.
However, you can buy metal with dollars.
It’s just that the exchange rate between metal and dollars fluctuates. It is not set in stone by the issuer.
People know that the value of dollars in terms of other goods, including metals, fluctuates. They do not expect one dollar to always buy a specific quantity of metal. They expect its market value to fluctuate. This should be obvious.
As far as I can see there is nothing fraudulent about this.
“Why are you accepting my paper in trade?
The answer of “Because someone else will accept it” is not sufficient”
Personally I think the chartalist explanation makes sense. However, monetarists tend to reject that explanation in favor of theories such as ‘network effects’.
So why do people buy Bitcoin, for example? Bitcoin can not be redeemed for a specific quantity of metal.
Unfortunately, I don’t think Bob Murphy will permit us to discuss this on this post.
Please bring it up later, though?
A dollar can’t be redeemed for a specific quantity of metal either.
That’s why it’s not money.
However, you can buy metal with dollars.
…
People … do not expect one dollar to always buy a specific quantity of metal.
It’s not that dollars are supposed to *buy* metal, but rather that it’s supposed to *mean* metal; be redeemable in metal (when the good that is backing an IOU is a metal).
So it’s not price fluctuations I’m concerned about.
If you don’t care about an IOU being backed by anything, then by all means accept my paper with numbers written on them.
I would accept your IOUs in payment if I thought they might have some value for me in the future.
That doesn’t mean that they would have to have a fixed value though.
Most IOUs do not have a fixed value – their price in the market fluctuates. If you look at the debt/ bond market you will see what I mean.
“That’s why it’s not money”
I’m not sure why you think something has to be redeemable at a fixed exchange rate for a specific quantity of metal for it to be money…?
Surely you can see that people use forms of money all the time, which are not redeemable for a specific quantity of metal? How do you explain this?
Most IOUs do not have a fixed value – their price in the market fluctuates. If you look at the debt/ bond market you will see what I mean.
You’re confusing the price of an IOU with the price of that which is “O”-ed (owed).
“IOU” stands for “I owe you”; It means that some thing is owed. A legitimate IOU has a 1:1 relationship between the promise and the thing promised.
That is, some particular thing is owed.
I’m not sure why you think something has to be redeemable at a fixed exchange rate for a specific quantity of metal for it to be money…?
No, not “something” – a non-fraudulent IOU has to be redeemable at a fixed exchange rate (1:1) because that’s what an IOU means (“I owe you something”).
An IOU for money which is negotiable and/or not immediately redeemable can not so much as be a money substitute; Rather, it’s a contract.
If there isn’t a specific amount of a thing (not a service) backing the supposed money substitute, then it isn’t a substitute for anything.
guest,
“You’re confusing the price of an IOU with the price of that which is “O”-ed (owed).”
A dollar bill can always be redeemed for one dollar, or in other words it can be used to buy one dollar’s worth of goods. That doesn’t mean that the value of one dollar in terms of other goods is fixed, however.
If I borrow 1oz of silver from you and promise to repay 1oz of silver, that doesn’t mean that the value of silver in terms of other goods is fixed either.
If one dollar is fixed by the issuer as being equal to 1oz silver, that doesn’t mean that the value of one dollar is fixed in terms of other goods. Nor does it mean that the value of 1oz silver is fixed in terms of other goods.
“What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates.”
And even when Mises says this in “Human Action”, it is still compatible with the view that he understood “inflation” here to mean a “great increase … in the supply of money” without “a corresponding increase in the demand for money”.
lK,
IN the quote you cited, Mises never mentions money demand. Why? Because he understands the demand for money(purchasing power) will always be infinite.
What Mises does say in the quote is that the definition of inflation has morphed from money supply to prices and wages.
So lK you have came full circle and used a Mises quote to prove our point.
Inflation is a great increase of money supply, prices follow.
The biggest problem I see today is the rampant outbreak of argueholics…
Look what you did.
Bad Bob.
Stick a fork in it.
http://www.lewrockwell.com/2014/07/bionic-mosquito/establishment-obsession-with-austrian-economists/
From the article:
Inflation was a term used to describe the relationship of currencies to goods – something backing the currency …
Exactly.
Yeah, I know I shouldn’t ask this, but exactly why does this issue matter at all? Mises defined inflation one way or another, or both ways, or a whole different way, or maybe he never defined it at all. Why isn’t this an issue of a “rose by any other name.” What one calls it doesn’t affect how it operates of whether Keynes or Hayek or Mises was right, does it?
Regarding the CPI Lie. This is calculated from a few selected items that don’t represent reality and purposely neglects and ignores the prices of valued items.
Just stop and look at the price of paintings or land or nearly most anything else. These prices are thousands of percentage points higher.
The items in the CPI are basically irrelevant, not to mention the items are misrepresented. Quantity and quality have substantially decreased in an attempt to make prices look better than they really are.
Time to wake up and smell the coffee. Speaking of coffee…
“Just stop and look at the price of paintings or land or nearly most anything else. These prices are thousands of percentage points higher.”
The “price of paintings”?? haha
First, no doubt the weekly spending of many/most households includes Rembrandts and Van Goghs!
Secondly, where is the evidence that “price of paintings or land” is “thousands of percentage points higher”?
Also, house prices have fallen considerably since 2009.
As for independent measures of the price level, strangely your increases of “thousands of percentage points” just do not show up:
http://bpp.mit.edu/usa/
Since when was inflation defined as an increase in the prices of goods that only poor people buy?
Inflation does not affect the prices of everything equally either.
This is why inflation generates malinvestment. Market actors have no way of knowing the real supply of capital needed to complete all the projects started without recourse to the imperfect, messy, fickle free market price system. So projects get started based on the heterogeneous nature of inflation affecting relative prices and profitability instead of inter-subjectively constrained marginal utility. So art can very much be a malinvestment “candidate”. So can inventory build up. Anything that can potentially earn profits, is at risk. Not just “capital goods” or “consumer goods” as per orthodox and consumption boom variations of ABCT.
Free market prices can stop the malonvestments the government brings about. Free markets are an improvement over government intervention into money. Nobody claims either is perfect.
One long red herring.
Where is the evidence that “price of paintings or land” is “thousands of percentage points higher”?
Do you have any evidence? Or do you know by magic or telepathy?
Nah,
I’d rather lead this discussion, you can do so later.
Inflation does not affect all goods equally. Saying that because not a lot of people own expensive art, that we should ignore, is precisely the head in the sand ideology that prevents you from understanding what inflation is. It is not the prices of goods only poor people buy. Luxury items are quite pro-cyclical. That means they rise with inflation more so that non-cyclical, or counter-cyclical goods.
Price inflation means different things to different people. Therefore as a macro measurement it is poorly defined and it gives only a vague indication at the best of times.
Even monetary inflation is poorly defined, because money can be different things to different people at different times. It can be a medium of exchange, or a store of value. Debt can be money, gold and silver can be money, Bitcoin can be money.
Oh, I’ll get to that in a more appropriate post.
It turns out that one point in particular, that was made in this discussion of inflation, will be quite relevant to that topic.
In other words, you’ve got NO evidence that the “price of paintings or land” is “thousands of percentage points higher”.
In other words, you have no response to my response about your nonsense that price inflation is only referring to prices of goods that poor people buy/
Who says you get to determine what is excluded or included when determining price increase? Who says households have to be limited/confined to Walmart?
House prices since 2009, lol. Nice selective statistic gathering. You know what the say, statistics lie and liars use statistics.
And yes things of value that are desirable have definitely increased in price by thousands of percentage points. Heck, even some common items have increased by 1000%.
lK.
That MIT ink you provided is just more of the same garbage, only glorified.
You want reality?
Create a fixed budget for an average household. 30 years later, compare the cost versus income. Then tell me who is maintaining.
Where is the evidence that the “price of paintings or land” is “thousands of percentage points higher”?
Also from what date are you talking about? The context suggests from 2008.
“Also, house prices have fallen considerably since 2009.”
Umm, look closely and you’ll see they’re feverishly trying to re-create that bubble; while you’re at it, take a look at rents and farmland values.
Which raises a point!
Certain price increases are “wonderful” while others are venomous
The 70’s inflation was brought about by oil price increases (so they say)…. but housing price increases do no such thing?
Where do we draw the line between good and bad? How stupid is it to demand policy to re-inflate (lol) home prices? One’s loss is another’s gain………
What say you, and please elaborate.
This whole topic gladly reminds me of how glad I am I decided not to pursue a “career” in economics and happily diverted to software development.
So true. There are so many better things to do, except that my liberty depends on arguing for at least some of this stuff.
Rothbard, poor guy, it would seem was more or less a hermit, with all the writing he did.
#MakeItStop
Mises makes exactly the same point about “big cash-induced changes in purchasing power” being too vague in The Theory of Money and Credit. There again he says that, if it is used, the term inflation should apply not only to “big” cash-induced changes in purchasing power, but also to small cash-induced changes in purchasing power, as the value of money is never completely stable:
“In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange value of money must occur If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange value of money did not alter could hardly ever exist for very long. The theoretical value of our definition is not in the least reduced by the fact that we are not able to measure the fluctuations in the objective exchange value of money, or even by the fact that we are not able to discern them at all except when they are large.
If the variations in the objective exchange value of money that result from these causes are so great that they can no longer remain unobserved, it is usual in discussions of economic policy to speak of inflation and deflation (or restriction, or contraction). Now in these discussions, whose practical significance is extraordinarily great, it would be very little to the purpose to use those precise concepts which alone come up to a strictly scientific standard. It would be ridiculous pedantry to attempt to provide an economist’s contribution to the controversy as to whether in this or the other country inflation has occurred since 1914 by saying: “Excuse me, there has probably been inflation throughout the whole world since 1896, although on a small scale.” In politics, the question of degree is sometimes the whole point, not, as in theory, the question of principle.
But once the economist has acknowledged that it is not entirely nonsensical to use the expressions inflation and deflation to indicate such variations in the quantity of money as evoke big changes in the objective exchange value of money, he must renounce the employment of these expressions in pure theory. For the point at which a change in the exchange ratio begins to deserve to be called big is a question for political judgment, not for scientific investigation.
It is incontrovertible that ideas are bound up with the popular usage of the terms inflation and deflation that must be combated as altogether inappropriate when they creep into economic investigation. In everyday usage, these expressions are based upon an entirely untenable idea of the stability of the value of money”
This is exactly the same point that he makes in Human Action. So its obvious that this point has nothing at all to do with rejecting the definition of inflation as ‘an increase in the supply of money greater than the demand for money, resulting in the a fall in the purchasing power of money’, or ‘cash-induced changes in purchasing power’ or any other such formulations of his definition.
You’re still ignoring the incompatibility between inflation defined as:
1. Increase in money supply greater than demand for money such that purchasing power falls; and
2. Inflation has regrettably been redefined as rising prices.
The reason these are incompatible is because according to 1., if prices don’t rise, then that would mean no inflation has taken place. But that would mean inflation only takes place when prices rise. That doesn’t gel with 2.
Mises was taking the existing, “regrettable” definition of inflation, and saying he does not prefer inflation to be rising prices. He prefers the definition of inflation to mean the increase in quantity of money that causes the rising prices.
That’s the catallactic treatment.
When he speaks of the politics of inflation, i.e. “Inflationism”, he habitually doesn’t even mention demand for money holding or fall in purchasing power. He refers to quantity of money. He speaks of inflation “paying” for war that the public would not otherwise pay for. Does this mean Mises believes inflation does not pay for war if the printing press financing doesn’t raise the prices? Of course not.
Mises was adamant that the reason inflation become synonymous with rising prices, was so that governments can inflate, and claim there is no inflation because prices did not rise much more than normal so as to be not very noticeable.
The real wealth is still being redistributed away from the market and towards the government. That’s the real goal.
Mises defines inflation in the Theory of Money and Credit as an increase in the supply of money that is greater than the demand for money, such that purchasing power falls. In Human Action he refers to inflation as ‘a cash-induced change in purchasing power’ and explains that cash-induced changes in purchasing power are affected by both supply and demand for money. In a later lecture and text he refers to inflation as “an increase in the quantity of money without a corresponding increase in the demand for money”.
The problem he has with the so-called “new fangled” definition of inflation as simply “a rise in prices” was that it did not specify a monetary cause.
But you obviously don’t care whether what you say is true or not.
“But you obviously don’t care whether what you say is true or not.”
Philippe,
Of course, M_F doesn’t!
Also, notice how Bob Murphy has been silent as the grave on this thread — this is usually a sign he has been defeated and refuted.
,
I did not deny what Philippe wrote.
Murphy hasn’t been refuted.
You do understand that Bob actually works for a living, right? He doesn’t have time to sit here and debate all day (especially lately). Further, have you ever noticed that Bob doesn’t typically take the time to respond to most of what you say? Trust me, that has nothing to do with the correctness or incorrectness of your arguments. Absolutely *nothing* to do with that.
When he deletes your and my comments, it means we are worth his time.
😀
*high five*
Who, me or LK?
Sorry, the replies to comments tend to get more ambiguous as the commentary moves further to the right (in terms of the format, of course).
“You were too stupid to grasp he concept of self ownership. “
lol.. What has “self ownership” got to do with this debate?
We’re talking about how Mises defined inflation.
He defines it explicitly in The Free Market and Its Enemies (1952 [2004]), p. 44 as:
““Inflation is an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings.”
http://www.fee.org/publications/detail/the-free-market-and-its-enemies#axzz2mXfFRfH7
No doubt this simple fact contradicting Murphy’s post provokes outage and anger in you.
Get over it.
Yet nowhere in the quote you provided does Mises define inflation as prices.
lK, your gig as chameleon Is getting tired.
lK,
[Edited for civility.–RPM]
Read the entire lecture, don’t selectively quote.
On a side note: Debt is now money so a keen modern economist would not consider cash and debt disparate. Both are now money. Soon cash will be extinct and debt will be the only money.
6TH LECTURE
Money and Inflation
ONE OF THE PROBLEMS WITH WHICH AN ECONOMIST MUST STRUGGLE is the fact that the terminology of business was developed prior to the development of economic theory, so that the language is not particularly appropriate for dealing with economic problems. One such case, which has resulted in real difficulty, is that of the money market.
At the end of the eighteenth century the British economists found the “money market,” which was concerned with the lending of money to businesses. The terms “demand for money” and “supply of money” were already in use to signify the demand for, and supply of, loans. These terms were so firmly established that they could not be used for dealing with monetary problems, that is, for dealing with the demand for, and supply of, money as such. On the contrary economists had to point out that the rate of interest and the demand for loans on the market did not depend on the amount, or quantity, of money in existence. They had to point out that there was a demand for money, for cash money, independent of the demand for loans. As the stock market and the money market became more and more familiar to the people through newspaper reports, this was difficult for them to understand. Almost every newspaper used this business terminology to report on the state of the money market, i.e., the loan market.
Economists pointed out that there exists on the market a demand for money and a supply of money similar to the demand for, and supply of, any other article. It should be noted parenthetically, however, that this demand for, and supply of, money has nothing to do with the demand for, and supply of, loans. It is significant also that while the demand for most goods is a demand for consumption, the demand for money is not a demand for consumption; the demand for money does not consume or destroy the individual piece. The demand for money per se is a demand to hold money, a demand for “cash holding.”
Because future conditions are necessarily uncertain, people must keep a definite amount of cash on hand. Should things be certain, they could invest every bit of money for a definite time. Knowing exactly when they would need cash, they could plan to have their investments mature at that time. But because one cannot estimate exactly when money will be needed, one must keep a certain amount of cash on hand or in a checking account; one cannot lend or invest all one’s cash money.
Money in circulation is the sum of all cash holdings. Concerning the history of an individual money piece, there is no money piece that is not held by somebody, i.e., no cash that does not occur in somebody’s cash holding. It goes from one person’s cash holding to another person’s cash holding. In the case of any particular money piece, there is no instant between these two situations. There is no such thing as money that is not owned by someone and the disappearance of which in some way, for instance by fire, would not hurt the individual whose money it was.
False definitions, incorrect explanations and interpretations, of money fall into two classes, namely that money is either (1) something more than a commodity, or (2) something less than a commodity. But in reality money is neither more than, nor less than, a commodity; it is everything that a commodity is. Like any other commodity, the supply available influences its market value and like any other commodity, it is in demand because people consider it useful.
Because there is a demand for money for cash holdings, and because people are ready to part with goods to get money, the value of the object used for money is enhanced by this demand. The value of gold increased when it came into demand for monetary purposes. Similarly, the value of silver rose when it was demanded as money. When money conditions changed in the course of the nineteenth century and silver became less important for use as money, its value per unit, its purchasing power, tended to go down.
Inflation is an increase in the quantity of money without a corresponding increase in the demand for money, i.e., for cash holdings. I do not mean to say that inflation in itself does not influence the demand for money. The quantity of money and the demand for money are not absolutely independent magnitudes. The demand for money for cash holdings depends on the individual’s specific understanding of future conditions—his speculation and his ideas about the future.
At the start of an inflation, that is, at the beginning of an increase in the quantity of money without a corresponding increase in the demand for money, it causes a rise in prices. Then, if the people have learned something from theory or from history, they may anticipate still further price increases. In that case, they expect prices to rise and the purchasing power of each money piece to decline and they will tend to restrict their cash holdings, as compared with what they would have in the absence of such speculation as to the future purchasing power of money. This depends on the speculative reaction of the public. On the other hand, if people think prices will drop, there will be a tendency for them to increase their cash holdings in the expectation that the purchasing power of money will rise.
By and large, an inflationary change in the purchasing power of money is caused by the fact that a few people are quick enough to realize what is going on and to adjust their activities to the inflationary policy of the government. They do not always have great minds. Nor are they necessarily more intelligent than others. They just react more quickly than others. In Germany and Austria when there was inflation after the first World War, some “silly speculators” were pushed by accident into buying stocks on margin. It was not that they were clever, but the bankers were less clever. The banks held the common stocks, financed the sales, and sold the stocks to some speculators on margin. In a very short time, the speculators became extremely rich. And then very soon they lost what they had gained because they didn’t know what was going on.
Not everyone distrusts their government in this respect, as these quick ones must have. So long as those who are quick in anticipating inflation are in the minority and the slower ones are in the majority, so long as the housewife postpones purchases in the belief that prices will drop, telling herself that everybody, the government especially, says prices will go down, the inflation can continue. This mentality is the basis for inflation, the rock on which it is built. As more and more people discover there is something “fishy” about the government’s statements and then when one day everybody discovers it, the whole thing begins to break down. This change comes overnight. It comes when the housewife decides it is better to buy immediately rather than to wait until tomorrow, or until next year, because then prices will be still higher. In Germany after the first World War this was called Flucht in die Sachwerte—flight into true values.
This is a characteristic of every inflation that is not stopped in time. The first period may last many years; the government is then triumphant. The second period lasts for only a very short time. In Germany the first period lasted from August 1, 1914 , until the end of September 1923; the second period lasted only three or four weeks. The second period in Germany was characterized by the fact that the workers were paid every morning in advance. Their wives would go with them to work; each man received his money, handed it immediately to the Mrs., and then she went to the nearest shop to buy something—anything—just to get rid of the money. To buy something was better than to keep the money which would lose value by tomorrow.
Such inflationary adventures have happened several times in the course of history. Most have been stopped by the governments before the second period. The three most important times when inflation has run its course are (1) the United States with the Continental currency in 1781, (2) France in 1796, and (3) Germany in 1923. There have been inflations in other smaller countries too, such as Hungary , but they were not so important.
The situation of the southern states with their Confederate currency in 1865, was another matter. It could be said it was different because the Confederate government itself broke down with the defeat of its forces.
In the twentieth century, Karl Helfferich [1872–1924], an excellent writer and a gifted economist but who lacked the qualities that make a man stand up for his opinions in public, invented a slogan: the money of the victorious nation will prove to be the best and will retain its value after a war. But this has not been the case in history. In the United States in 1781, the colonies were victorious; they had just defeated a great country, Great Britain , and yet the Continental currency degenerated. Also in 1796, France had been successful in military campaigns, and yet she suffered inflation. Helfferich was doubly wrong when it came to Germany —first, in thinking Germany would be victorious in World War I, and secondly, in believing that its money, as the money of a victorious nation, would necessarily be good. Helfferich failed to realize that whether a country is rich or poor doesn’t matter—when it comes to inflation what is important is its basis for putting additional money into circulation.
Every inflation that isn’t stopped in time consists of two periods—the catastrophic crack-up boom, which is very unwelcome, and the runaway inflation. It is an economic law that things happen in this way. The length of the first period depends on conditions which we may call psychological; it depends on the minds of the people, on their judgment, on their trust in their government. And it depends on their ideas, on the pseudo-economics with which they have been indoctrinated. So it is impossible to estimate how long the first period will last.
The Germans were definitely indoctrinated. They had confidence in their government. Even as late as October 19, 1918 , they believed they would be victorious in the war and they thought their money was safe. They blamed the speculators for raising the cost of the U.S. dollar. The unsophisticated eighteenth-century farmers in the United States and in France had better judgment in these matters than did the sophisticated bankers in Germany . Let us not forget that the German banks broke down in this period because they were ignorant of the problems involved in the inflation.
This leads us to an explanation of why price controls cannot work. The government increases the amount of money. This is the inflation. Everybody has more cash in their cash holdings than before. The result is that the individual has a surplus of money which he hasn’t spent for daily consumption. In his eyes this is a surplus cash holding. If he doesn’t prefer to buy some luxury goods, he wants to invest a part. The small man invests it in savings banks or insurance policies. The big business enterprise appears with this amount directly or indirectly on the loan market. For a while the government succeeds in keeping prices down. Price control doesn’t remove the danger. But by making it easier for people to buy at low prices what they would have bought anyway, it increases the amount of money in their pockets, in their cash holdings, which is available for other purchases.
The inflations of the two World Wars in this country were comparatively mild because a great part of those workers who had earned additional money tended to increase their cash holdings during the war. The small worker really did increase his cash holdings in anticipation of a post-war move and because some goods were not obtainable during the war—radios, refrigerators, automobiles, and so forth. This is a characteristic of the first period of inflation. Remember the housewife who says, “let us keep the money; next year prices will be lower.” But as soon as people discover that things may be otherwise, the catastrophe may occur. These explanations of the simple man make the situation critical and dangerous.
Today [1951] there is still powerful resistance to inflation. There is still a lot of talk about the necessity of restricting inflation. It is true that 90 percent of this talk is just nonsense consisting, for instance, of plans to conceal the inevitable effects of the inflation by price control. But nevertheless, as long as there is such a resistance and as long as the government and Congress are forced to concede that there is danger in inflation, the danger is not yet great. The breakdown occurs when government officials no longer care what happens and fear that they may not be in control later.
During the last World War in most of the countries the economists were prevented from saying what was happening in their own country because of censorship. Or they were prevented from talking because they were in the army. But in the first World War, not all the countries were involved. In Sweden , which was neutral, there was an economist, Professor Gustav Cassel [1866 –1945]. As a neutral, he had the privilege of visiting Germany one week, England the next, and in between of stopping in the Netherlands and Belgium . He wrote about what he saw. Cassel told the Germans, “You are inflating your currency and your profits are not real profits but illusionary profits.” He told them they must take the additional money out of the system (1) by taxes and (2) by loans. But the Germans did not have the courage to tax those who had received the extra part of the money. They tried an excess profit tax, which removed only a small part. They tried loans in this way—in order to buy 100 Marks of such a loan, the citizen had to pay only 17 Marks and the remaining 83 Marks to pay for the loan were provided by the government’s printing new banknotes. Thus, every new issue of bonds meant an increase in the amount of money. This shows how even the best advice is useless in the hands of people who have such ideas.
Now I want to deal with the second problem. In the second part of the eighteenth century, Great Britain was on the gold standard. This was evident to everybody because there were gold coins in use every day in daily business transactions. Also in use were notes of the Bank of England and, at that time already, the beginning of checkbook money. The banknotes were used as money substitutes and were redeemable immediately, without any delay or excuse. This was the gold standard as it existed in England in the eighteenth century, and as it was adopted in the course of the nineteenth century by the more important continental countries of Europe—F r a n c e, Germany, the Netherlands, Belgium, and the Scandinavian countries.
Adam Smith had suggested that if all travel could be done by air, the land then used for roads could be put to more productive use such as farming. In this same vein, economists began to ask whether or not it was really necessary that mankind devote a part of its toil and trouble to the production of precious metals in order to have a good currency. If one could construct a currency with less expense, it would be advantageous. In 1819, Ricardo reasoned that one could do away with gold coins and have only banknotes which should be redeemable, not in coins, but in ingots, bullion. This gold bullion could be used for international transactions. This would save the money involved in making gold coins in smaller denominations. For more than 60 years Ricardo’s suggestion remained a “dead letter.”
In the 1870s, countries, that were having a hard time financially and yet wanted to get on the gold standard in the cheapest way, discovered this solution of Ricardo’s. It was called the “gold-exchange standard.” Toward the end of the nineteenth century and the beginning of the twentieth, many countries adopted this type of gold-exchange standard. It differed only in degree from the classical gold standard. On behalf of the American public, Professor Jeremiah Jenks [1856–1929] of New York University studied this gold-exchange standard in the Far East—the Malayas, the British West Indies , and so on. He was enthusiastic, as was his assistant, Professor Edwin Walter Kemmerer [1875–1945]. People didn’t see anything questionable in this theory. I can’t say that I was enthusiastic myself, but I couldn’t see any reason why it shouldn’t be adopted. One German economist said that by concentrating all the gold in the hands of the government, it would make things easier in time of war. What it does is to make it easy for the government to manipulate the currency, which always means to manipulate it downward, thus preparing the way for inflation. When a country has a gold-exchange standard and no gold in daily circulation, no one realizes what it means when the government declares that banknotes are no longer redeemable.
When the first World War broke out all the countries went on the gold-exchange standard. There was still a little gold in circulation, but not very much. Even the countries on the gold standard had gradually approached the gold-exchange standard more and more. Soon in place of the gold-exchange standard fiat money standards came in all countries. After the war, all countries were eager to return as quickly as possible to the gold standard. But most only returned to the gold-exchange standard by making the domestic currency redeemable in foreign exchange, and giving that to the people instead of gold. But in 1929, with the crisis, people began to advocate something else.
The gold-exchange standard with a flexible parity was known as the flexible standard. When the banks had issued banknotes they really redeemed the money; a discrepancy of one-tenth in the parity at which the notes were redeemed was considered disgraceful. (Incidentally, in the 1870s, French banking was centered in Paris and the gold was in Paris , which was in the hands of the Communists. Yet even then a deviation from parity of 5 percent in the currency was considered terrible. Today [1951] a currency is considered stable if it deviates no more than 20 percent.) The redemption of their notes by the central banks was controlled by the public, because the central banks were obliged to publish a statement every week telling the public the whole situation.
Step by step, governments acquired the opportunity to replace the gold-exchange standard with the flexible standard, which meant parity was no longer determined by law but perhaps by a bureaucrat. Bank transactions were transferred from the bank to a new agency. In Britain , this was the Exchange Equalization Account. First of all, parity was no longer fixed in the same way as before; it was surrounded by secrecy. From time to time the newspapers printed a statement that the currency was weaker, which meant that the bureaucrats had changed the parity a little bit. From time to time it was changed to a greater extent depending on the country and so forth. Devaluation could occur even in a country ostensibly governed by democratic methods. In Switzerland in 1936, even though assurances had been given that the Swiss franc would not be devalued, it was accomplished in half an hour by a meeting of Parliament. They really had no choice—the preceding policies, such as subsidies to agriculture, the watch industry, the hotels, and so on—had put them on the spot. And even in such a democracy, the change was accomplished by administrative action.
The flexible standard was defended by Keynes and his followers as a great thing, but it disappeared when something even “greater” was substituted. Great Britain ’s return to the gold standard at US$4.86 in April 1925, had led to higher import prices, declining exports and unemployment. In 1931 [September 21], Britain abandoned the gold standard and the value of the pound sterling was left to fluctuate. It declined. Money is like any other commodity. As there is no custom line between Manhattan and Brooklyn , prices increase between the two boroughs only by the amount of transportation charges. If there were a custom barrier, conditions would be different. So it is with money. If Brooklyn had a separate coin system from Manhattan , the exchange ratio between these two moneys would be established at such a height that it would make no difference whether the commodity was bought in one place or the other, with one money or the other. Should a difference appear, immediately there would arise an opportunity to make an advantageous deal. This advantage would continue until the difference disappeared.
We speak in the same way of Great Britain ’s devaluation in 1931 when it went off gold, and her devaluation of two years ago [ September 18, 1949 ] when the rate was changed from $4.03 to $2.80. But these are two absolutely different things—they have nothing in common. In 1931, when the British abandoned the gold standard, the amount of foreign money or gold that the owner of a British banknote had been able to obtain was reduced. It was intended by this means to keep the British currency stable with reference to foreign currency. The British government assumed a monopoly in the trade of gold and foreign exchange and the right also to expropriate foreign exchange. In revaluing, what they had had in mind was changing the rate at which British holders of foreign money would be indemnified on the one hand, and on the other hand the rate at which the importer would get his foreign exchange from the British government.
Two years ago in Great Britain , the $4.03 parity was a historical fact like any other historical fact. It was a parity de facto—it was the legal norm for the expropriation of Britishers who owed foreign money, and the price they had to pay for foreign money. But in fact the pound on the world market was worth only $3.00, more or less. In a treaty with the United States the British government promised that on a certain date they would again begin to redeem their currency against gold, dollars, and so on. But the British government no longer had clever bank-economist advisers. They had not considered what it would mean if it should be possible to redeem the money in London in the relation of three to four; anybody in the world would be able to buy a pound for $3.00 outside the United Kingdom and then sell the same pound to Great Britain at $4.00. After four or six weeks they discovered that this was completely unrealistic.
Nothing of what you said addresses anything I said, let alone challenge it.
Going off on a slight tangent but sticking mostly to the topic at hand….this is what I don’t get….how Krugman, the intellectual leader of progressives (on economic issues), mocks everyone who’s been worried about (price) inflation and insists it is incredibly low right now (maybe even too low, “dangerously” low!!! ZOMG!!) yet there are many useful idiots on the left parading around squawking about how bad inflation is to use as an excuse to argue for an increase in the minimum wage. See below for a common example.
https://twitter.com/randyprine/status/492542846189445120
Can’t these people make up their minds?!
No, many people cant make up their minds because they don’t want to, they simply want to argue.
But that twitter link you provides justifies my point hat minimum wage suppresses wages for most people. This is why equity and capital owners love minimum wage. They only pretend to hate it. They are the ones who create and advocate minimum wage because it saves them bundles in wage cost..
Minimum wage is slavery. Ye sure it prohibits certain workers form getting a job but moreso it punishes productive and capable workers .Min wage has a tremendous trickle up effect. Min wage drags down wages al the way up to 50 bucks and hour.
Anybody making 8-50 bucks an hour would make much more absent minimum wage…
Of course inflation has to be zero and savings have to derive interest in order for you to leverage your skills. Absent sound money, wage labors are at the mercy of minimum wage…
Sometimes expansion of the money supply does not increase prices, instead you get a bunch of stuff nobody really wanted…
The trick is to put all of those useless items into the standard “basket of goods”, so since no one wants those items, the price will remain low and CPI will remain under control.
Problem ?!?
Nah, Tel, CPIs generally maintain a fixed and consistent list of items — revised only to reflect changes in weekly purchases of most households.
What you’re talking about sounds like the barking mad suggestion above from your fellow Austrian that *paintings* should go into CPIs.
Medical care is one of the categories that goes into CPI, and the recent Obamacare legislation has created compulsory medical care which would be a pretty close match to what Gamble was saying. I’m not the only one thinking along these lines:
http://seekingalpha.com/article/1878341-the-effect-of-the-affordable-care-act-on-medical-care-inflation
Thing is, how do you compare a voluntary price as against a price built around compulsion (plus direct government subsidy) ? How is such a thing even theoretically possible?
You’re saying that medical care has risen “thousands of percentage points higher” since Obamacare was introduced?
Where is your evidence of this?
Or did some magical unicorn or leprechaun tell you, tel?
You could even read the article:
Note, the new system involves taking government money (provided by the Fed, not the taxpayer) and feeding that into the medical industry as subsidy. It also involves getting people like Bob to pay more for their medical insurance in order to transfer the costs from other people. Measurement is a real problem when comparing this to the previous system.
Tel said: Thing is, how do you compare a voluntary price as against a price built around compulsion (plus direct government subsidy) ? How is such a thing even theoretically possible?
You notice lK glossed right over your question.
The Borg does not like trick questions…
lK,
You are barking mad to think there should be a CPI.
Fact is you and your ilk purposely ignore, evade and obfuscate money supply expansion.
Just the fact you find not even the slightest error, fault, or room for improvement with the CPI, speaks as to your true intentions.
Grocery store meat is now 25% water. The new and improved super concentrated laundry detergent does not work when using suggested quantity’s, a full scoop is still required to get a clean load( 120 loads, try 60). I can go on and on and on about the nefarious and deceptive nature of your beloved CPLIE…
Hey guys,
I thought you might enjoy a really well written article by Pigou from the Economic Journal beginning on page 486. He systematically goes through the multiple definitions used by economists for the word inflation.
“there is obviously much to be said for abandoning the term inflation altogether, and so dispensing with the need for any definition.”
Link here: books.google.com/books?id=ISTqEVM68rcC