Wednesday, July 6, 2011

What is Inflation?

"It is absurd to claim that paper drawn on 100 ounces of gold is sound, while paper drawn on 100 tons of steel is not."

I have been thinking about the idea of "inflation" in a different manner, since ZenB (I think it was) asked me a question in the Salerno thread.

In a fully free banking / free money / free currency environment, would we even think of the term "inflation"?

I don't think so. I think we would think of profit and loss. I think we would utilize forms of money and banking and currency that were the most efficient, effective and stable within the context of the circumstance at the time and place. We would not speak of inflation: if our choice was sound, it will add to our profit. If not, it will add to our loss.

However, this does not eliminate the need to discuss and learn about sound practices. I like the title of Salerno's book "Money: Sound and Unsound." It is worthwhile to discuss and learn about sound money practices. One would not argue against the utility of a book entitled "Business Practices: Sound and Unsound."

People should certainly be free to use unsound practices in business and in money. In business, if they do this often enough they will see bankruptcy. In matters of money, the same would apply. In a free market for money, we would not speak of inflation, I believe. We would speak of losses due to the use of unsound banking and money practices.

History demonstrates that paper backed by gold is quite sound. Paper backed by steel is not quite as much. This doesn't mean a businessman cannot utilize paper backed by steel in his transaction. It only means it is left to him and his trading partners to suffer the consequences (just another form of dealing with bankruptcy) without consequences shifting to the broader public (again, only in the context of a free banking environment).

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