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"Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Jack Guynn; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting."
Bill's point is quite right. The problem with Mises's definition is that it assumes that the inflation would come from an increase in the supply side alone, rather than the supply side not responding appropriately to a fall in the demand for cash balances. This is what makes it seem like a subset of the first definition Mark.
I'll check HA in the morning, but Mises did shift his definitions a bit. HOWEVER, he *never* accepted the Rothbardian definition of inflation, which is MNR's and his alone. As Bill also rightly notes, it's fascinating that Murray's "praxeologically correct" definition just happens to correspond to a world of 100% reserves, his preferred policy for ethical reason as well.
Murray is hardly authoritative on Austrian questions of monetary theory. In fact, HE is the outlier.
Bill Woolsey -
8/11/2006
Isn't it remarkable that Rothbard imagines that the only praxeologically proper definition of inflation is the policy he happens to oppose? (an increase in the quantity of money beyond the supply of specie.) I don't understand how this even makes sense in any monetary framework that isn't based upon specie reserves.
And, of course, the earlier Mises definition looks to me to describe inflation as to mean a surplus of money resulting from an increase in supply. (Why that should be different than one caused by a decrease in demand or some other more complicated scenario is puzzling to me.)
I wonder if a surplus of shoes is a praxeologically doubtful proposition?
Mark Brady -
8/11/2006
I'm not clear it's a third meaning, but rather a subset of the first meaning.
I don't have Human Action to hand but does Mises use inflation in this theoretical sense there? I checked Murray Rothbard's Man, Economy, and State, and he doesn't use inflation to mean "an increase in the quantity of money . . . that is not offset by a corresponding increase in the need for money." He does, however, point out that for inflation (and deflation) to be praxeological categories, it should refer to "_any_ increase in the money supply greater than an increase in specie" (MES, 1993 edition, p. 942 n131).
Steven Horwitz -
8/10/2006
"In theoretical investigation there is only one meaning that can rationallly be attached to the expression 'inflation': an increase in the quantity of money (in the broadest 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."
Ludwig von Mises, TTOMAC (1980: 272), Liberty Press edition.
And much of the "monetary disequilibrium" tradition of Warburton and Yeager uses this definition, at least to refer to "monetary inflation" as opposed to "price inflation."
Mark Brady -
8/10/2006
Who uses the word "inflation" in this sense?
Steven Horwitz -
8/10/2006
It has a third meaning Mark: a supply of money in the excess of the demand to hold it, which is distinct from either "an increase in the stock of fiat money" and "an increase in the price level."
Bill Woolsey -
8/9/2006
During the early thirties, the target for interest rates were dropped. The supply of fiat money (including bank deposits,) dropped, as did the price level.
I should add, however, that last I checked, the supply of fiat money (currency and deposits) was rising. So, I suppose that the failure to raise the interest rate target will allow this to continue. However, I am sure that the interest rate target could have been increases some, and the quantity of fiat money would have continued to rise.
As for the purchasing power of money (and the price level,) I think keeping the interest rate unchanged will result in continued inflation and even the small increase contemplated and rejected by the majority would have resulted in continued inflation. It is reasonably clear that the Fed's goal is low inflation--a slow decrease in the purchasing power of money.
A sufficient increase in the interest rate target would cause the quantity of fiat money to stabilize. And, a somewhat smaller increase in the target for the interest rate would result in the price level stabilizing. Unforunately, I have no idea what that interest rate would be, though I am quite certain that it would be a moving target over time.
Mark Brady -
8/9/2006
I had in mind that inflation has two meanings: one refers to an increase in the stock of (fiat) money; the other to an increase in the overall price level, in other words, a fall in the purchasing power of money.
Bill Woolsey -
8/9/2006
One of the peculiarities of interest rate targetting is that holding interest rates constant can be deflationary!
Heck, it is even possible that a lower target for interest rates is deflationary--consider the early thirties!
I suppose this is one reason why interest rate targetting has been criticized by many free market economists.
Steven Horwitz -
8/9/2006
Just a reminder that not all increases in the money supply are necessarily inflationary. I'm not making a claim about this one specifically, but to assume that a vote to hold interest rates where they are is a vote for inflation is not necessarily correct.
