Inflation as theft

Noah Smith writes a somewhat facile post targeting internet Austrians. They're too easy of a target - and I doubt that thinkers like Mises, Menger, or Hayek would disagree with any of Smith's facts and calculations.

They might disagree with the spirit of his post. His post paints a somewhat benign view of inflation. For instance, he pokes fun at the idea that inflation is akin to stealing by pointing out that a large component of the public (those with large debts) actually benefit from inflation.

The "inflation as stealing" meme is a very old one that predates Austrian thinkers, as I pointed out in my comment:

On a superficial level I agree with you.

On a deeper note, the idea that altering the value of money can be equated to stealing is a very old idea that predates Austrian economics, and in attacking Austrians you're also attacking thinkers like Adam Smith, ARJ Turgot, and Richard Cantillon who wrote along similar lines and were reacting to very real circumstances.

In medieval Europe, the sovereign was often the realm's biggest financial actor, controlled the mint, and by corollary set the definition of what constituted the unit of account. Debts were payable in these units. Prior to paying off its debts, the sovereign had a huge incentive to "cry up" the coin - reduce the amount of gold in the unit of account, thereby reducing the real amount the sovereign owed its creditors. On the other hand, when the sovereign was creditor and expecting payment, they had a huge incentive to "cry down" the coin, thereby increasing the amount of gold in the unit of account and increasing the real value of what they were to receive.

In short, there have been situations in which inflation and deflation "steal" the public's resources (the public being anyone who is not the sovereign). I would be hesitant to apply this to the modern western situation, but in analyzing the economics of modern third world dictatorships, it is important to understand how the dictator - much like a medieval king - might utilize the monetary system to redistribute resources from the public to his/her circle of cronies and thereby maintain a grip on power. I would strongly recommend most people from these sorts of nations to ignore your somewhat facile and euro-centric description of the effects of inflation and other forms of monetary confiscation, but I doubt they need my advice as they are probably more well-versed in the specifics than I.

In short, when the entity that is the largest debtor is also the entity that defines the nation's unit of account, and also controls the balance sheet of the nation's central bank, you have a significant conflict of interest. That doesn't mean that something conflicted will necessarily occur... but you might want to keep the potential for shenanigans in mind. In times past, conflicted sovereigns haven't always been hesitant to use their control over the monetary system to steal from non-sovereigns, and thus the meme "inflation is theft" has survived over the decades.


Here is Adam Smith, who in pointing out why the coin of the realm was below the original standard in weight, ascribed it to:

...the temporary and fraudulent views of the government, who found their interest at times to diminish the coin by adding a greater quantity of alloy, in order to pay off their various debts with a small quantity of silver and gold... in the 1st place, the creditors of the government are cheated of their money; if the coin be one half less they have but one half of the value that was given to the government, though they have in appearance the whole. To screen themselves also it is necessary that all debts in the kingdom should be paid by this money in the same manner as by the old money. So that all the creditors in the kingdom are in this manner defrauded of their just debts.

Two sources which are quite good on the method of augmentation and diminution of the coin of the realm. The first is from this chapter from Richard Cantillon's Essai sur la Nature du Commerce in Général, the second is excellent paper called Chronicle of a Deflation Unforetold by Francois Velde. The latter has another paper with Rolnick that describes the terminology of augmentation and diminution.


Here is a key for understanding the terminology:


Augmentation =  a way for the prince to reduce the real value of his debts owed by reducing the amount of gold in the nation's unit of account. An alternative way of thinking about this, the number of units of account that each coin could "purchase" was augmented.

Diminution =  a way for the prince to increase real income from debtors by increasing the amount of gold in the nation's unit of account

Debasement is a different term - it means to changing the physical constitution of the coin by reducing its gold content. The opposite of debasement is enhancement - adding precious metals to the coinage.  

W.H. Hutt (not Jabba)

David Glasner recently posted on the economist William Hutt and his book A Rehabilitation of Say's Law:

Hutt’s insight was to interpret Say’s Law differently from the way in which most previous writers, including Keynes, had interpreted it, by focusing on “supply failures” rather than “demand failures” as the cause of total output and income falling short of the full-employment level. Every failure of supply, in other words every failure to achieve market equilibrium, means that the total effective supply in that market is less than it would have been had the market cleared. So a failure of supply (a failure to reach the maximum output of a particular product or service, given the outputs of all other products and services) implies a restriction of demand, because all the factors engaged in producing the product whose effective supply is less than its market-clearing level are generating less demand for other products than if they were producing the market-clearing level of output for that product. Similarly, if workers don’t accept employment at market-clearing wages, their failure to supply involves a failure to demand other products. Thus, failures to supply can be cumulative, because any failure of supply induces corresponding failures of demand, which, unless there are further pricing adjustments to clear other affected markets, trigger further failures of demand. And clearly the price adjustments required to clear any given market will be greater when other markets are not clearing than when they are clearing.

North and South Euros

I had an interesting conversation with Miles Kimball at his blog concerning his idea of splitting the Euro into a North Euro zone and a South Euro zone. This seems like a far more realistic solution than reintroducing drachmas, punts, pesos, and lira. Nevertheless, there are some thorny issues here which Miles says he will address in future blog posts.

In short, a South Euro will quickly depreciate. Because wages are sticky, exports from the southern Euro zone will be relatively cheaper than exports elsewhere, providing a short to medium term boost to Greece, Italy, Spain, and Portugal.

One concern here is that the continued circulation of North Euros in South Euroland, as well as the North Euro's continued use as a unit of account in South Euroland, would make those living in South Euroland highly cognizant of nominal changes and therefore less likely to fall prey to the degree of money illusion that is necessary to drive an export-led recovery.

Of course, as Miles points out, his is a fourth best solution, so one should only nitpick so much, never mind the fact that it takes a solution to beat a solution, and I don't have one.

More on own-rates

The discussion on own-rates, the natural rate, and Sraffa cropped again.

Andrew Lainton blogged here, followed by Nick Rowe here, Daniel Kuehn here, and David Glasner here.

It seems to me that Nick and David are more or less on the same side of the aisle. I commented on Nick's post here, and Nick provided a helpful response. I commented on Glasner here, and he gave me some good feedback.