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« You Cannot Be Serious | Main | Do People Say Silly Things About Monetarism, New Institutionalism, and Public Choice as well? »


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Thank You, Dr. Boetkke.

I've been following that string of economic, monetary and Ron Paul posts that Megan has been making. The exchanges have been entertaining but lacking the posters with the economic prowess to really jolt the conversation and provide clarity.

I hope Megan reads your article and posts another entry in response. It's all very educational.

How much training does McArdle have in monetary economics? Where?

I think it is obvious that a gold standard will fail to provide for perfection. Replacing gold with a fiat standard managed by God would result in better macroconomic performance. But then, corrupt or incompetent currency management can create disasters. Of course, having some kind of gold standard or other doesn't protect against all sorts of disasters.

So, it comes down to the likelyhood that actual managers will operate closer to God-like levels of knowledge and benevolence vs. how often do we face Zimbabwe like incompetence and venality. And, of course, a gold standard combined with unit banking, pyramided reserves, bans on suspension clauses, or what have you.. could have an impact.

I have yet to see McArdle make an argument that even comes close to showing a basic understanding of the issues.

I wish she would make fun of Alan Greenspan a bit. That ignoramus favored a gold standard and questioned the need for a central bank too.

Oh well, I guess it is easier to make fun of Ron Paul.

That said, I don't think that Ron Paul's actual proposal of removing the legal impediements to using gold or silver as money is very dramatic. For the reasons suggested by McArdle, I doubt it would have much effect.

I have yet to see any concrete proposal by Paul for winding down the Fed. Perhaps he is anticipating a Zimbabwe like disaster so that a new system will arise from the ashes of the old.


Megan's understanding of the legal tender laws was incomplete. By law, United States dollars must be accepted in payment of debts. Thus Gresham's Law tells us that dollars will tend to circulate instead of less inflationary currencies. Debtors will always prefer to pay in dollars, and creditors cannot deny them.

Ms. McArdle could also use to meet Mr. Horwitz. :)

On the costs of inflation, Pete could have linked you here:

And on the role money plays in facilitating economic coordination, and human communication more generally, see my 1992 paper on the analogies between money and language:

And there is also George Selgin's Cato Policy paper from 1985, which remains one of the best accessible introductions to the free banking literature, including a proposal for reform, here:

Can anyone explain why Tyler Cowen was defending her on this issue?

Could someone clue me in on the "empirical record" regarding "government attempts to monetize its debt"?

Dr. Boettke doesn't give specifics, but I am willing to bet cash money that none of his examples include the United States in the past 30 years. And I wouldn't be suprised if the "empirical record" does not include a single example the 70 or 80 years.

As Boettke describes in his post, even "the great inflationary period" of the mid-20th century was a result of ill-advised "Keynesian" policy perscriptions and not some transparent attempt to inflate the nation's debt away.

Why is that? Have we just been lucky for the past century? I doubt it. More likely, the Federal Reserve's institutional independence has mitigated the problems outlined by Buchanan et al.

Personally, I think if the empirical record shows anything it's that the central governments are slowing learning that inflation can be harmful and are taking steps to solve the problem (the world's future can be found in NZ). If the only good thing about the gold standard is that it will "solve" the problem of inflation, then Megan is right. It is a solution looking for a problem that doesn't exist anymore.

Dee Williams,

If you are using the neoclassical definition of inflation, that is true. However, you are posting on an Austrian blog, and the Austrians see inflation as any increase in the supply of money, regardless of what consumer prices do. They see this as a problem because of how it distorts price signals in the economy (specifically the rate of interest).

You say the Fed does not monetize debt, but unless their website contains incorrect information, the Fed's Open Market operations do exactly that. To lower the Federal Funds Rate and inflate the supply of money, the Fed purchases treasury bonds, paying for them with freshly-printed money. If this isn't monetizing debt, what is?

I do agree that it is absolutely crucial to separate money from politics as much as possible, and we are certainly better off for having the money supply not controlled by congress. However, that line of reasoning might lead one to the same conclusions that Ron Paul and Hayek reached: The government has no business passing legal tender laws at all.

The Federal Reserve monetizes debt all the time. That is an open market purchase.

It isn't the same thing as using iflation to reduce the real value of outstanding debt.

Anyway, the U.S. did use money creation for finance WW2.

Since that time, it has been more complicated. There have been economists who advocated inflationary policies. However, you shouldn't assume that the ability to fund government spending without other undesirable consquenences (like taxes or a contraction in interest senstive, export, or import competing sectors,) is independent of the political support different "schools" of economic thought find.

Even today, is the dominant view that a measured 2% inflation rate is appropriate independent of the fact that this generates funds for the government? Maybe the advocates of this view are correct. But does the fact that tax hikes, spending cuts, (or debt financed defict effects) can be avoided idependent of why the politicians put up with this?

Anyway, the most important point is that as the fiscal crisis in the U.S. develops due to medicare and social security, as well as the continued build up of debt, the benefits for the politicians to support members of the Board of governors who believe that inflation is beneficial will again grow.

I believe there was tremendous imrpovement after the seventies, both among economists and amoung politicians. But things could turn in the other direction again.


If you look at Buchanan and Wagner's Democracy in Deficit, and then Wagner and Tollison's book on fiscal irresponsibility published by CATO in the 1980s, you can get a good idea of the argument that I am trying to run and yes definitely it relates to the US.

The Keynesian period fed into that problem, it is not a separate problem.

Also I assume you have read the work on intergenerational accounting and the problems that the US faces due to our fiscal irresponsibility. The question is who will pay that bill?

Central Bank independence is an assumption not a fact, and public choice economists have raised fundamental questions about that --- my favorite work on this is by Wagner on boom, bust and the political business cycle. But the literature on the political business cycle theory is relevant to the discussion.

Good questions though.


G wrote:

"the Austrians see inflation as any increase in the supply of money, regardless of what consumer prices do."

Well no, not all Austrians. Those of us coming from the monetary equilibrium tradition would say that monetary inflation is defined as an "excess supply of money", i.e., the supply of money being greater than the demand to hold it at the existing price level. On this definition, an increase in the supply of money that matches an increase in the demand to hold real balances is NOT inflationary. And, inflation can result from a fall in the demand for real money balances not matched by a corresponding fall in the supply.

You are quite right the price level isn't the issue, as real factors can affect it. But not all Austrians agree with the "all increases in the supply of money are inflationary" view. Mises didn't agree with it in The Theory of Money and Credit, for one thing.

--G wrote: "Megan's understanding of the legal tender laws was incomplete. By law, United States dollars must be accepted in payment of debts."--

I never saw where McArdle had any confusion on that point, but I think you may be confused. By law, DEBTS assumed in the absence of any other contract are always repayable with US currency. However, in situations where no debt exists when the transaction is initialized, the seller can legally specify that only certain forms of payment will be accepted in exchange for goods or services, or two parties can negotiate a contract in which repayment terms are in some form other than money.

Obviously, if the debtor defaulted and his affairs were rearranged by a bankruptcy court, the court would probably redenominate the payment in terms of US currency; but that's not what was under discussion in that thread.

I think Greg Clark and Douglas North have argued that political institutions really are efficient. North says that disrupting them would usually require violence and Clark says that the inefficient ones, like the Soviet Union, end up falling apart and replaced by more efficient ones. I didn't read Acemolgu's paper, which is not open-access, but I did enjoy the Friedman-to-Wittman overview of Public Choice that discussed applying the Coase Theorem to politics.

Dr. Horowitz,

I continue to struggle with something. I recently finished reading The Theory of Money and Credit, yet I cannot grasp how it can be that there is an "excess supply of money." Or, the supply of money being greater than the demand to hold it. I do understand that people "get rid" of their money by purchasing goods (e.g., homes, gold, cars, tools, etc.) in order to circumvent inflation. Nevertheless, Mises goes into depth about how the "demand for money" may be constantly heightened due to banking policies reducing the natural rate of interest. Moreover, he describes money as a peculiar commodity that people may wish to hold on to for manifold reasons. Therefore, how is it that there can be an "excess supply of money" when someone ALWAYS wishes to have money in their hands?

Btw, I am answering my own question by mentioning his discussion about inflation as a function of their being more money in circulation than the number of goods?


The demand to hold wealth in the form of money is not infinite at a given price level. The easy "proof" of that is to ask what you do every payday. Do you leave your paycheck in your bank account for ever and ever? My guess is not - at that moment you say "I have too much of my wealth in the form of money and I need to make a portfolio shift to transfer more of my wealth into the form of rent, food, and the like and less of it as money." Paying the bills is reducing your money balances back down to where you want them to be. We are always trying to figure out the optimal amount of money to hold as real cash balances. We CAN have actual money holdings that are greater than we desire at the existing price level.

What inflation is, is this phenomenon happening economy-wide. Suppose we start in a position where everyone's current money holdings are exactly what they want them to be. Now the Fed injects reserves and the MS goes up. People will certainly ACCEPT the money into their holdings, but that doesn't mean they desire to KEEP them there. In fact, at the current price level, ex hypothesi, they do not. So they get rid of money by spending it (or buying a financial asset), with the result being the rising prices we associate with inflation. Eventually prices rise sufficiently that the now higher nominal money supply's real value is reduced back down to the value of real money balances that people wish to hold.

People don't get rid of their money to "circumvent" inflation - getting rid of their money is a consequence of the excess supply of money and the proximate cause of the rising prices that excess supply causes.

There's a difference between people's constant willingness to "accept" money in exchange and their unwillingness to hold greater or smaller real money balances than they deem prudent. "Accepting" money is not the same as "holding" it. We accept it because we know we can pass it on if we wish, so accepting it need not mean we intend to hold it. Again, think of your paycheck every two weeks.

The best piece on this might still be Leland Yeager's "Essential Properties of the Medium of Exchange."

Hope that helps.

Thank you Dr. Horowitz. I will look up that piece.

Everyone talks about getting cash for gold but many people forget that Silver is a precious metal with a high value too.

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