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How Is Inflation Defined (Mises vs. Rothbard)?

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Think Blue posted on Thu, Jul 22 2010 10:29 PM

Normally, Austrians define inflation as simply an increase in the money supply.

However, from what I remember from Rothbard, inflation is when the supply of money increases greater than the demand for money.  (Maybe from Amerca's Great Depression?)

Then I also faintly remember Mises saying inflation is when an increase in the demand deposits is greater than the currency on reserve in the banking system, but maybe I'm wrong.

My question is:  Did Mises define inflation differently than Rothbard?

Extra bonus points if you can provide a quote.

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Gero replied on Fri, Jul 23 2010 12:29 AM

Ludwig von Mises said, “What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation.”

Viception, a book I finished reading recently, explained inflation: Inflation, money supply expansion, can lead to a general rise in prices. An expanded money supply affects the stuff supply by allowing buyers to buy more and sellers to charge more which can lead to a general rise in prices, an effect of inflation. Money is payment for stuff you provided. You buy stuff with the payment you made for past stuff you provided. New money being spent was not acquired by providing past stuff. The people who first spend new money are taking stuff from the economy without having provided any past stuff. In a barter economy, where transactions occur without money, the equivalent would be stealing your stuff. Inflation, money supply expansion, always pressures prices upwards. Inflation can occur without rising prices if there is a stuff supply expansion lowering prices, due to economic competition, while inflation pressures prices upward. The downward and upward pressures on prices cause price stability. Money supply expansion and stuff supply expansion caused price stability in the 1920s. Production data showed increasing output in major parts of the economy: automobiles, petroleum, manufactured goods, and raw materials. Money supply increases pressured prices upward while stuff supply increases pressured prices downward causing price stability. The money supply rose by about 7.3% per year, a total 55% increase from July 1921 to July 1929. The money supply rose by an increase in loans to businesses. The currency in circulation was constant during the 1920s. Inflation prevents a better living standard by preventing falling prices that benefit consumers. Money supply expansion does not affect everyone equally and simultaneously. The money is usually first acquired by favored government recipients. These recipients can use the money before prices have risen. The increased money supply has yet to pressure prices upward. When you, a non-favored person, receive the money, prices have risen, and you have paid those prices on your devalued money. Inflation discourages saving. When people know their money will devalue in time, they are incentivized to spend it instead of save it. Before paper money backed by nothing was widely used, people could safely save using common money like gold and silver. Gold and silver either maintained or rose in value since their quantity was relatively stable while the stuff supply rose. The only way for a general price rise, excluding a stuff supply contraction, is if the money supply rises. Some people have argued credit cards can cause general rising prices. In an honest economy, any credit lent must first have been saved. Any credit-caused spending was due to someone saving, preventing general price rises. Some economists fear fallings prices. Falling prices, due to productivity, is a rising living standard. With an honest money supply backed by a commodity (usually gold and/or silver), there is a tendency for prices to fall. The money supply stays relatively constant while the stuff supply rises, allowing each money unit to gain purchasing power. The same amount of money and more stuff means the price of the stuff falls. Money supply expansion is easy. Stuff supply expansion is not easy. Money is not wealth. Stuff is wealth. Money was created by people, not government. People used paper redeemable in a commodity like gold or silver because using paper was easier than carrying either commodity. Rulers decided to put their faces on the money and eventually involuntarily severed the tie between the commodity and the paper because one cannot print gold or silver. If you use a printing press to create money, you are a criminal counterfeiter who devalues the currency. If government uses a printing press to create money, it engages in legal monetary policy.

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Thanks for the quote.  But to be clear, I'm not looking for a personal explanation or opinion what exactly is inflation.  I would like to know how Mises or Rothbard explained it. 

More importantly, if Mises and Rothbard actually disagreed on the subject, particularly with respect to money and banking or bank credit expansion.

Here is an example what I pulled from the Mises Made Easier glossary:

Inflation. In popular nonscientific usage, a large increase in the quantity of money in the broader sense (q.v.) which results in a drop in the purchasing power of the monetary unit, falsifies economic calculation and impairs the value of accounting as a means of appraising profits and losses. Inflation affects the various prices, wage rates and interest rates at different times and to different degrees. It thus disarranges consumption, investment, the course of production and the structure of business and industry while increasing the wealth and income of some and decreasing that of others. Inflation does not increase the available consumable wealth. It merely rearranges purchasing power by granting some to those who first receive some of the new quantities of money.

This popular definition, a large increase in the quantity of money, is satisfactory for history and politics but it lacks the precision of a scientific term since the distinction between a small increase and a large increase in quantity of money is indefinite and the differences in their effects are merely a matter of degree.

A more precise concept for use in theoretical analysis is any increase in the quantity of money in the broader sense which is not offset by a corresponding increase in the need for money in the broader sense, so that a fall in the objective exchange-value (purchasing power) of money must ensue.

NOTE: The currently popular fashion of defining inflation by one of its effects, higher prices, tends to conceal from the public the other effects of an increase in the quantity of money whenever the resulting rise in prices is offset by a corresponding drop in prices due to an increase in production. The use of this definition thus weakens the opposition to further increases in the quantity of money by political flat or manipulation and permits a still greater distortion of the economic structure before the inevitable readjustment period, popularly known as a recession or depression (q.v.).  [Emphasis mine]

Here in the same glossary is something much more closer to what I'm looking for:

Money relation. The relation between the demand for money (cash holdings in the broader sense) and the quantity of money (in the broader sense). Every change in either the demand for money or the quantity of money alters this relation and sets in motion forces which step by step change individual prices and the complex of production, while making some individuals richer and some poorer. Each such change also affects market interest rates. When the force has spent itself and is not able to affect any further changes, the final result of every change in the money relation is an altered interrelationship of individual prices (price structure).  [Emphasis mine.]

There seems to a whole lot of thread discussion about fractional reserve banking and the money supply, so if those folk would kindly come over on this thread, and make an attempt at an answer, I'd appreciate it.  Thanks.

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Anybody else?

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