printing money is NOT inflationary

Economics Economics Questions
1

Many libertarians I’ve talked to seem to think that ‘fiat’ money is inflationary by nature; over even that if money is not backed by gold and silver it is inherently inflationary.

I honestly don’t understand how people can think this.

On the contrrary, even if a government were to simply print money on a printing press, without borrowing it, lending it, or even backing it with anything, this would not neccessarily be inflationary.

Why?

Well, consider the Erie Canal. I used to live near it, but for those who aren’t familiar, it’s a canal built in the early 19th Century which connects the Great Lakes, all the way through the state of New York, to the Hudson River and then from there out to the Atlantic Ocean.

It was built, yes, by the government, and, once built, it lowered the cost of transporting goods through the state by 95%.

Imagine transporting 10 barrels of whiskey from Central New York to a harbor for export in pre-canal days; traveling over rocky dirt roads in a wagon pulled by oxen. Hell on Earth, right?

Once the Canal was built, a few men with a raft and poles could do the same work as could only previously be done by both men and oxen, or the oxen could pull ten times as much by walking along side the canal and pulling with ropes, there being no potholes, rocks, mud, hill etc to deal with, and far less friction. [As you can see from the below image, you’d be drifting ‘with the current’ most of your way to New York City.]

The government of New York used taxes to raise the funds it needed to build the canal, but imagine that it just printed the money instead. Let’s say the printing of money increased the money supply in New York State by 10%, which would, all things being equal, lower the value of savings for all people in New York by 10%. But of course, all things would not be equal. For a farmer in Central New York, or anywhere along the Great Lakes, the price of any transported goods would fall by by more than ten percent, while the profit they could make by transporting their goods to market would increase by more than ten percent. The price of commodities in New York City would likewise fall by more than the cost needed to build the Canal. The Canal, in other words, was simply “a good investment,” without exception for the people of New York and beyond.

These benefits did in fact happen, and led to a “an immense contribution to the wealth and importance of New York City, Buffalo, and New York State. Its impact went much further, increasing trade throughout the nation by opening eastern and overseas markets to Midwestern farm products and by enabling migration to the West.”

In other words, the Canal’s effect on prices was DEFLATIONARY, and would have been no matter how the money was created, raised or spent. The government spending money caused prices to FALL, incomes to RISE, and nearly everyone in the State to became wealthier as a result.

There is nothing wrong with a government spending money; there is nothing wrong even with government creating, or even simply printing money. What does cause inflation and is wrong is money spent on waste, war, destruction, and cronyism, which is always inflationary and impoversihing, whether done by public or private parties.

The only way to rectify institutions which destroy the wealth of society, whether public or private, is, of course, for the aggreived public to take control.

2

Holy crapoly… how did you cram so many fallacies into one post? I’m not going to try to tackle the fallacies, I’ll leave that to others with more patience. I will note, however, that if it’s not wrong for governments to print money than it is not wrong for individuals to print money. An action that is wrong for an individual cannot be right for a group of individuals since, at some point, all actions are performed by individuals. If it is wrong for me to print my own money, then it’s wrong for me to belong to a gang that prints money. And if it’s wrong for one gang (organization) to print money, it’s wrong for any gang (government) to print money.

This is ethics 101.

Clayton -

3

So basically, this is an ad for public works projects?

4

Benjamin, I don’t think the others will take you seriously, but I will. I have a few questions that should bring our disagreement to the foreground.

  1. Does printing money cause more goods and services to be produced or not?

  2. If the resources used to build the canal were left to the owners of those resources to do what they wanted with them, what would those resources have been used for?

  3. Would the alternative uses of those resources been less efficient or more?

  4. How do you know the answer to number 2 and 3?

5

No. If the government had printed money, it would have increased the money supply. That the newly printed money was directed toward a project that then reduced transportation costs does not change the fact that, in the way Austrians mean it, there was inflation. There can be inflation (again, in the Austrian sense) alongside falling prices (due to productivity increases). I might be thinking of some other boom, but I believe it has been said that the productivity of the 1920s hid the inflation preceding the 1929 crash: if you looked only at the price level, you would conclude that there was not much inflation during that decade.

Imagine if the government did not print the money (well… it didn’t; as you said, it was taxed): transportation costs would still fall, without a rise in the money supply. Which would mean that, nominally, transportation costs would be even lower than if the state did choose inflation.

All you seem to have said is that money should be spent on good things. I don’t see what that has to do with fiat money.

In other words, inflation means anything that is bad. How do any of these things cause inflation? Certainly, inflation can often appear alongside war and cronyism, but ‘waste’ does not cause inflation. War does not cause inflation. The price of steel might rise due to increased demand for the war effort, but we don’t call that inflation, any more than we say drought or oil spills cause inflation.

6

Ben,

to start off, this depends on your definition of inflation. Austrians define inflation as the increase in money supply, regardless of price levels (why? because Austrians refer to inflation as the increase in price relative to what it would have been sans printing $); on the other hand, mainstream definition (which you are using) refers to inflation as the increase in prices.

Now, i’m not too familiar with the details of the Eerie canal, but let’s assume that this was the case (cheaper goods, more money), this this would be a case where in mainstream terminology is deflationary (reduced prices), but in austrian is inflationary (more money going around). go figure.

Having said that, was it worthwhile for the government to engage in this project (as no doubt the Keynesians are telling you)? Well, think of it this way: the money had to be taken from people/businesses either through taxation, or, as in your example, through money press, means two things: 1) loss of business activity (less profitable), and 2) businesses has that much less money to reinvest/purchase equipment/whatever. then, as Solid Choke (!?) pointed out: would the alternative (private) uses be more or less efficient than before?

One thing that really favours the keynesia arguments is that all these projects and effects are very visible: you see people at work, you see prices fall and so on, however the alternative (what we lost due to the taxes/extra fiat money) is never seen nor can it be properly calculated and thus any real cost-benefit analysis of the project is difficult and (almost) meaningless. Having said that, you should check out Economics in one lesson; more specifically chapters 4 and 5.

Last, and certainly not least, from my curiosity, I just (very) briefly skimmed the wikipedia article on the Eerie canals; it seems that it was, in fact, privately funded (and according to the search feature, no mention of taxes or printing money). so, yeah, it seems it was private and not government :slight_smile:

7

“The government of New York used taxes to raise the funds it needed to build the canal, but imagine that it just printed the money instead. Let’s say the printing of money increased the money supply in New York State by 10%, which would, all things being equal, lower the value of savings for all people in New York by 10%.”

But, one major problem with this, is that all things will not be equal with the printing of this money. Everybody cannot all recieve the new money at the same time, and thus those that do recieve it first will be able to push the prices of goods higher while those that do not get the money find out that their money cannot buy as much as before.

8

As someone who lives less than a few miles from the canal now I can attest that large sections have either been covered up or are largely useless other than serving pleasure craft despite rather hefty maintence costs.

The economic illiteracy is astounding.

9

1. Does printing money cause more goods and services to be produced or not?

It depends, doesn’t it? Governments, like individuals, can waste spectacularly or invest money wisely. I can spend money on drugs, and be poorer and less healthy for it, or I can spend money to start a business, and be richer for it. It’s the same with governments.

2. If the resources used to build the canal were left to the owners of those resources to do what they wanted with them, what would those resources have been used for?

The only thing we can say for sure is “nothing of that scale.” A large scale project like the Erie Canal might benefit everyone in the State by 20% every year after it’s built, but require a 10% contribution from everyone until it’s built. People aren’t going to contribute 10% unless they know everyone else is too, and the project is actually going to be completed. This is the advantage of voting.

Also, something like a canal is a “structural monopoly.” If it was built by private hands, the owners of the canal would charge tolls that are as high as the market could profitably bear; meaning, it wouldn’t reduce the cost of shipping by 95%, because the owners could charge tolls of half the difference and it would still be used. As a public works project, the tolls could be as low as the cost of operating it. The canal is simply more beneficial to society if done through the government. Than done privately.

3. Would the alternative uses of those resources been less efficient or more?

Less.

4. How do you know the answer to number 2 and 3?

It’s self-evident that canals are structural monopolies;

it’s proven by history that government provides the large-scale cooperation and trust needed for large-scale infrastructure projects (Erie canal, transcontinental railroad, most roads and bridges, the inter-state highway system, rocket ships, the internet etc.

Large scale cooperation can achieve more than small scale local efforts.

In short, logic and observation.

10

As someone who lives less than a few miles from the canal now I can attest that large sections have either been covered up or are largely useless other than serving pleasure craft despite rather hefty maintence costs.

That’s because the government built a a superhighway system right next to it, smarty pants. I-90 follows basically the same route.

11

it’s proven by history that government provides the large-scale cooperation and trust needed for large-scale infrastructure projects (Erie canal, transcontinental railroad, most roads and bridges, the inter-state highway system, rocket ships, the internet etc.

12

Do you know what a dominant assurance contract is? Did you know that there are many historical examples of the private provision of public goods?**

I challenge you to cite a historical example of a public good being provided privately that lead to long to price gouging.

Lol. All of these things have been provided privately at one time or another, and it has always everywhere been superior to contemporary government efforts. Throw me some citations and we can have a historical debate about it.

False dichotomy. The scale of free market action is variable. Some of it is small, individual, local. Some is international, beyond the jurisdiction of any one government. You should know this because your kind constantly whines about multinationals.

13

“It depends, doesn’t it? Governments, like individuals, can waste spectacularly or invest money wisely. I can spend money on drugs, and be poorer and less healthy for it, or I can spend money to start a business, and be richer for it. It’s the same with governments.”

Governments don’t waste their own money, they waste everybody elses. People who spend other peoples money, are obviously going to spend more recklessly than they would with their own money, especially if they don’t have to pay it back, and if there’s no consequence for a bad investment. I also don’t think too many succesful entrepreneurs are going to waste all of their savings on drug consumption.

14

I consider your argument suprisingly valid but irrelevant… Because it’s equivilent to saying that it doesn’t matter if you lose money gambling as long as you make it back by winning a single big gamble, because that is what you’re doing, GAMBLING. Betting under the assumption that completing the project will decrease costs exponentially, such is possible but this means nothing. It is possible for an ametuer marksman to pull off some remarkable shots with a sniper rifle but I don’t think that Ametuers will replace trained snipers in the field any time soon.

However printing money is almost certinaly inflationary. If I print a trillion dollars then this is not circulated then you’re right, it is not inflationary. However if I do this and then distribute it in a way that does not decrease costs so much (which is most likely with public works). I think you’ll be interested to know that the Canal was soon made obselete due to private railroad industries however, although you do seem correct in your short term statement.

There really are a lot of arguments which could be made here but I shant spend my time making them. You’re technically right, but in all practice you might as well be wrong. A stranger will not always be offended if you come up and insult him, but the stranger almost always is.

15

One point that nobody’s brought up yet is that inflation is never interest-rate neutral… that is, inflationary spending causes the business cycle. Taxation is bad enough but it only redistributes resources from the uses that private individuals would have put them to the uses that public agents put them instead. This causes a misallocation of resources but only in the “public sector”. Inflation perniciously causes misallocation of investment in the private sector, that is, the entire economy, through the business cycle. If the government pays for a bridge to nowhere out of taxes, the only loss is the resources that were wasted on building the bridge - the private sector is forced to feel the pain in all other sectors as taxation redistributes the monies away from non-bridge-building production to bridge-building. But if the government pays for a bridge to nowhere out of inflation, the private sector is not forced to feel that pain and that is exactly the cause of the misallocations. New businesses are opened to cater lunch to bridge-builders without other businesses elsewhere closing. At first, things look rosy and booming until the inevitable bust comes where the inflationary lie is exposed, that there was not an increase in real goods and services in the economy, only an increase in paper money which changed nothing in reality except that it gave the government extra buying power over and above the taxes it collects.

But, no, you’re right, the printing of money is a miraculous boon to humanity. May Bernanke flood us all with Zimbabwean tidal waves of US dollars so that we may all live in the prosperity of the Weimar Republic circa 1922!!

Clayton -

16

I challenge you to cite a historical example of a public good being provided privately that lead to long to price gouging.

Microsoft Windows? Credit card interest rates? Water privatization?

Lol. All of these things have been provided privately at one time or another, and it has always everywhere been superior to contemporary government efforts. Throw me some citations and we can have a historical debate about it.

Well, when I drive on a privately built highway or hear about private-sector space exploration, I’ll be happy to compare the merits. Right now, there’s nothing to compare.

17

the inflationary lie is exposed, that there was not an increase in real goods and services in the economy, only an increase in paper money which changed nothing in reality except that it gave the government extra buying power over and above the taxes it collects.

blah blah blah. yeah, of course it can be misspent, just like it can be well-spent.

18

“or hear about private-sector space exploration”

It’s in the works… Link and Link

SpaceX aims to change this paradigm by developing a family of launch vehicles which will ultimately reduce the cost and increase the reliability of space access by a factor of ten. Coupled with the newly emerging market for private and commercial space transport, this new model will re-ignite humanity’s efforts to explore and develop Space.

Of course, the private sector stuff has to compete with bloated government agencies as well as government’s aerospace regulations etc.

"when I drive on a privately built highway "

As far as the highway stuff goes, I drive on privately created and owned roads all the time! They’re usually in front of businesses. :slight_smile:

Building a private highway would be challenging, considering your competition is “free” socialized government highways that most likely occupy all the best routes already. Dr. Walter Block has a whole book on that subject, check it out.. I believe it’s available in the Mises literature section.

19

No he is not valid. The great project which government build that decreases price levels, could have also been implemented with non-printed money (either by government or private…if it is so brilliant i’m sure private ent can find out about it). If it had been done with non-printed money price levels would be even lower, therefore it did lead to inflation.

20

Microsoft Windows? Credit card interest rates? Water privatization?

First of all, “price gouging” is a fairy tale of economic idiocy. The just price is the market price, by definition.

Secondly, it’s hardly fair to cite Windows as an example of “overcharging” given that it has a state-granted monopoly in the form of IP “rights.”