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

Chapter 6The Policy of Stabilization

To begin the discussion in this chapter, we need to define the objective of a policy of price-level stabilization. The advocates of price-level stabilization and of central bank–controlled moderate inflation can have no objection to any moderate, trending, and therefore reasonably predictable changes in purchasing power, such as the secular deflation of commodity money. Their very own model entails just such on-trend purchasing power changes. What their system must achieve is to smooth out the potentially abrupt changes in purchasing power that may stem from sudden changes in money demand.

Problems with Price Index Stabilization

The advocates of price level stabilization argue thus: As relative prices are all-important in directing resource use toward meeting the most urgent needs of the consumer, it is essential for economic agents to always be able to distinguish changes in prices that result from the sphere of goods and services from changes in prices that result from a change in money demand or money supply. In a commodity money system, in which the supply of the monetary asset is essentially fixed, how can economic agents isolate price changes that result from changing consumer preferences or a changing supply of certain goods and services, from changes in prices that simply result from changes in the demand for money? As this is not possible in an economy with inelastic money, economic agents must frequently err in their economic calculations. ...