Paper Money Collapse: The Folly of Elastic Money, 2nd Edition

Chapter 5Common Misconceptions Regarding the Price Level

The main reason why the phenomena analyzed in the previous chapters, although powerful and for a long time the intense focus of theoretical investigation, are not at the forefront of present monetary policy discussions is that it is widely believed today that money that is broadly price-level stable, meaning, whose purchasing power as measured by some price index does not decline too rapidly or is not otherwise too volatile, is also “neutral” money, that is, this money should have no distorting or disruptive influences on the real economy. It would not be an exaggeration to say that a reasonably stable price level has become the accepted definition of good money, and that, as long as the central bank delivers an acceptable degree of price-level stability, it must have done a good job. Price level here means any of the broad-based statistical averages of prices in the economy that are considered reasonable representations of money’s purchasing power, such as, most important, the consumer price index, and sometimes the producer price index and potentially others. In today’s debate, a reasonably stable price index has become shorthand for monetary stability. This is not a new idea but has been deeply engrained in neoclassical economics. In his 1931 book Prices and Production, which provides an excellent exposition of the Austrian Business Cycle Theory, Hayek quotes Cambridge economist Arthur C. Pigou as saying that “if countries ...