Thursday, September 10, 2009

Inflation's meaning(s)

Since much criticism (here, for example) of my End the Fed review has focused on my criticism of Ron Paul for defining inflation as any expansion of the money supply, I refer critics to this paper (PDF, and yes, it's from the hated Fed) "On the Origin and Evolution of the Word Inflation." In brief, the classical economists of the 19th and early 20th century regarded inflation as too much money circulating, not as any increase in the money supply. Example:

…inflation occurs when, at a given price level, a country’s circulating media— cash and deposit currency—increase relatively to trade needs. (Emphasis in original.)
—Edwin Walter Kemmerer (1918)
Paul, by contrast, defines inflation as monetary expansion in absolute terms, and that's why it's a neologism -- it reflects neither the widely accepted modern definition (general increase in prices) nor the classical view.


Tom Dougherty said...

The Fed article you cite puts it this way, ”Inflation, a term that first referred to a condition of the currency and later to a condition of money, is now commonly used to describe prices. This shift in meaning seems to have originated in an unfortunate —but perhaps inevitable —sequence of events.”

So, the Fed article describes the shift in terminology of inflation as a condition of money [Ron Paul’s view] to inflation as a general rise in prices [your view] as unfortunate.

In addition, Milton Friedman is famously quoted as saying, “Inflation is always and everywhere a monetary phenomenon.” Notice he did not say that inflation is always and everywhere a price phenomenon as you criticize Ron Paul for not maintaining.

There are many monetary theories for changes in the price level not just one theory - Keynesian theories, Monetarist theories, Austrian theories. Ron Paul is using a variant of the Austrian theory that has been around for over 50 years and certainly not a neologism. To suggest as much is to display an ignorance of economics.

TAYLOR said...


So I guess that means the Austrians were all born yesterday? Or do they for some reason not count as economists from the 19th and 20th centuries?

Surely you know who the Austrians are... you link to Lew's site and you reviewed Ron Paul's book. Do you think Paul just came up with these ideas on his own? He's not that original.

Kenneth Silber said...

Friedman's famous statement is actually that "substantial inflation is always and everywhere a monetary phenomenon." (See Free to Choose p 254.) I agree with it, by the way. He's referring to inflation as resulting from excessive monetary expansion, not as being the monetary expansion itself.

Now, imagine a situation where the money stock is growing slowly while goods and services are growing much faster--such that prices are declining. Does it make sense to refer to what's happening there as "inflation"? I think it doesn't.

TAYLOR said...


Does it make sense to refer to what's happening there as "inflation"? I think it doesn't.

Does the inflation (expansion of money supply) result in a siphoning off of purchasing power into the newly created money from all existing holders of money?

I think it does.

Consider, if the money supply had not been expanded at all, your money would've appreciated in purchasing power as it should have (more goods with same money means your money can now by those additional goods whereas before it did not). Instead, that purchasing power is literally stolen from you.

Why are you such a big fan of theft again? I don't follow that logic.