The view of Mises on deflation is worth noting – especially as it is different to the view of Murry Rothbard.

Deflation in the way this word is sometimes used – a fall in prices, often happens under commodity money (whether it is gold, silver or whatever). It occurs when the amount of money increases more slowly than the amount of goods (of course we must be careful of “price level” nonsense, but this can be seen in a rough-and-ready way).

But this is not what Mises means when he writes of deflation – he is writing of the effort to make a unit of money (say the British Pound or the American Dollar) worth what it once was before an inflation of the money supply.

A nation goes off the gold standard and produces a lot more notes. Then the government of that nation decides to go back on the gold standard – should it go back at the new exchange rate of notes to gold (say the government now has twice as many notes as it did before in relation to its stock of gold – so the notes are now only worth half of what they were in terms of gold) or should seek to get back to the old exchange rate between notes and gold?

Mises would say “admit the new exchange rate, do not pretend the notes can be worth the amount of gold they used to be worth”. Rothbard would say “get back to the old exchange rate”.

Murry Rothbard argued that by inflating the money supply the government had (for example) done an injustice to those who had lent out money (cheating them). Mises would argue that the individuals who would gain by the deflation of the money supply are very rarely the same individuals who lost by the inflation of the money supply.

Also (of course) Mises is worried by the effects (in terms of recession and unemployment) caused by a deflation. Rothbard argued (and Mises agreed) that such effects are temporary (they only last till the market clears), but Mises was concerned both by the suffering caused by these things and by the excuse they gave to government for statism (to “fight the recession” or to “help the unemployed”) which, of course, would cause even more suffering over time.

It might be better if notes were not used at all (a debased coin is less difficult to spot than a note that does not represent gold in the vault), but as bank paper or whatever notes have long been used.

Even a law defining a “Dollar” as a fixed weight of gold of a certain purity (or some other commodity) can be got round by a determined government – the Mises/Rothbard dispute is really about what should be done AFTER such a government has done its damage (caused a money supply inflation) and now wishes to stop.

If the government says “well we have X weight of gold and Y number of notes – so the note is only worth a tiny amount of gold now” this will not achieve Rothbard’s objective of getting back to the old exchange rate – but it would be enough for Mises.

Finally, yes most money these days only exists in credit-money computer records – by saying “notes” I was trying to save time.

If the population increases 20% and the money supply increases 20% then has the money supply been inflated?

Yes. By 20%.

Do not confuse the figure on the paper with the real wealth (which didn’t increase merely because there are 20% more people).

“Murry Rothbard argued that by inflating the money supply the government had (for example) done an injustice to those who had lent out money (cheating them).”

It does not follow from this argument that Prof. Rothbard would advocate a return to the old parity. He knew quite well the Misean argument quoted in the article.

In fact, given Prof. Rothbard’s political predilictions, he would say that the losses some suffer because of the institution of the new parity are further evidence that the State cannot be trusted, period.

It should go without saying, but I will say it anyway.

The banking and monetary system should be totally divorced from the state, including the coining of money. Paper money would only consist of warehouse receipts, as described in my above post.

Paul Marks,

I think you have an ill-founded and exaggerated view of any disparity between Mises’s and Rothbard’s view of money and inflation.

For instance, you suggest that “Rothbard would say “get back to the old exchange rate”.”

How do you figure? Have you read any of Rothbard’s proposals for getting the dollar back to a gold basis? It is anything but advocating getting back to some old and impossible exchange rate. I think it would bring the dollar to something less than 1/1000th an ounce of gold. That does not sound like the old 1/35 an ounce it was in the past.

“If the government says “well we have X weight of gold and Y number of notes – so the note is only worth a tiny amount of gold now” this will not achieve Rothbard’s objective of getting back to the old exchange rate – but it would be enough for Mises.”

In fact, this approach is exactly what Rothbard recommended the fed take to put the dollar back on a gold basis, immediately preceding the fed’s permanent dismantling.

David Spellman:

One positive aspect of the abolition of the Federal Reserve and return to specie, would be the ability to wipe a very large percentage of debt away. Any debt held by the Federal Reserve would simply disappear. Debt held by the Social Security and Medicare trust funds would also disappear when those respective agencies are liquidated. That leaves the amount of debt held by foreign and domestic creditors. These could be paid off over a thirty year cycle as the respective debt instruments come due, the longest debt instruments being thirty year bonds.

If the government absolutely HAD to incur debt, than it should be structured as most localities structure debt. That being bonds issued in the fixed amount with a tax levied to repay the bonds, usually in five years. The tax burden is thus laid squarely were it belongs and NOT on children and grandchildren, etc.

Ultimately, if you break up central banking, you cripple government’s ability to incur large debts.

“I would remove the U.S. constitutional authority to coin money AND go into debt.”

I’ll see your stipulations and raise you a removal of the authority to tax at any level.

That should about solve the problem in Washington.

LOL.

Don:”It seems to me that a silver standard would be preferable for a very simple psychological reason: silver lends itself to low-denomination coinage whereas gold does not.”

Good question! I think the confusion arises from differing ideas about money. Your idea equates money with the change in your pocket. But most money today is nothing more than digital electrical signals, such as those generated when you use a credit or debit card. Modern money should be tied to a precious metal, like gold, so that its supply can’t be easily increased. If the money supply can be increased easily, it leads to inflation and all of the distortions and problems associated with it.

Would would Mises prefer gold to silver? Partly because the free market place chose gold over silver in the late 19th century. It did so because silver became much too common. There was a time when iron was more valuble than gold, but then iron became very common. Gold is still rare enough that increasing the world supply by any significant amount is difficult to do, so gold retains its value well. If paper, or digital money were tied to a specific amount of gold, it would retain its value as well and thereby eliminate the destruction caused by monetary inflation.

Don, I’m curious. What is the psychological effect of money and why is it important?

Interesting thoughts. Maybe we could build a grass roots movement for a silver/gold standard by issuing real gold and silver currency. You may have something there.

If a merchant doesn’t want to accept cash money then what? He can trade his goods for goods and services or, if he knows the customer, can take an IOU for future goods or services. “Money” has become a govt issued IOU. The advantage of the govt issued IOU is that the merchant doesn’t have to redeem it with his customer.

Second, defining of inflation in terms of money in circulation is convenient for economists but meaningless for the working class. The only thing that matters to us is having a job that pays the bills with a little left over. The only sort of inflation which matters to me is how many hours I must work to pay the bills. If I have to work more hours to buy the same stuff then there is economic inflation in my life.

I propose that the concept of money be scrapped and be replaced with standard work hours. One swh would be the amount of work done by a laborer with a shovel in one hour. This quantity is not abstract but is univeral world wide and hasn’t changed since the steel shovel was invented.

Goods and labor would be charged in multiples of swh. At the start, a swh would be set at the national minimum wage in every country that had a minimum wage. If a plumber thought he was worth four times more than a day laborer he would set his initial fee at 4swh/hour as see if the customers would accept that rate. Since the end of WW2 a new basic model car in the USofA cost about a halfg year’s pay for an average working class person. a standard work year is 2080 hours. Half of that is 1040 hours but the average pay is probably twice the minimum wage so a new Toyota Corolla might cost around 2000 swh.

If nothing else, this would tend to equalize the bottom line world wide for the working people. Wages would tend to be equal but prices would vary country to country?

Thank you for having the time to discuss this topic. I truly appreciate it. I

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