“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 2009 : 240).The significance of this passage is discussed by Horwitz (2000: 78), who argues that it appears to allow the idea that a fractional reserve banking system could create credit (fiduciary media) in response to demand for it, without, in Mises’s view, causing inflation.
In contrast to this, we have the definition of Murray Rothbard in Man, Economy, and State: A Treatise on Economic Principles (1962):
“The process of issuing pseudo warehouse receipts or, more exactly, the process of issuing money beyond any increase in the stock of specie, may be called inflation. A contraction in the money supply outstanding over any period (aside from a possible net decrease in specie) may be called deflation. Clearly, inflation is the primary event and the primary purpose of monetary intervention. There can be no deflation without an inflation having occurred in some previous period of time. A priori, almost all intervention will be inflationary. For not only must all monetary intervention begin with inflation; the great gain to be derived from inflation comes from the issuer’s putting new money into circulation.” (Rothbard 2004 : 990).This definition obviously contradicts that of Mises, and what we have here is another quite clear division within the Austrian school between those who
(1) hold to the “monetary equilibrium” view of inflation as increases of money greater than the demand to hold it (such as Steve Horwitz, and a view which is most probably held by all Free Bankers), andBIBLIOGRAPHY
(2) the Rothbardians and other anti-fractional reserve bankers who regard any increase in the money supply not backed by commodity money as inflation.
Horwitz, S. 2000. Microfoundations and Macroeconomics: An Austrian Perspective, Routledge, London and New York.
Horwitz, S. “Mises Defining Inflation the Monetary Equilibrium Way (in 1951),” Coordination Problem, September 3, 2009.
Mises, L. von, 2009 . The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala.
Rothbard, M. N. 2004 . Man, Economy, and State: A Treatise on Economic Principles, Ludwig von Mises Institute, Auburn, Ala.