Is Money Supply Growth The True Definition Of Inflation?

One of the more unusual diversions in the discussion of inflation is the argument made by Austrian economists that inflation is defined as growth in the money supply. I outline the reasons for my disagreement in this article. (Note: This is an unedited draft from a manuscript that discusses inflation.)

Shostak: Defining Inflation

The article “Defining Inflation” by Frank Shostak and published at the Mises Institute provides a succinct overview of the position of at least some Austrian economists. As a disclaimer, I am not an expert on the Austrian school, but it is safe to say that there numerous doctrinal splits, and “popular Austrian” economics one encounters on the internet and/or financial market commentary can be removed from the academic roots. In any case, I have seen views similar to Shostak’s article repeated many times over the years.

Shostak argues:

The fundamental problem here is a failure to define the problem properly.For example, the definition of human action is not that people are engaged in all sorts of activities, but that they are engaged in purposeful activities--purpose gives rise to an action. 

Similarly, the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services.

So “inflation” is not about prices, rather the money supply. He quotes Ludwig von Mises, who makes a stronger claim about the term.

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise.

That is, von Mises argues that inflation meant money supply growth, presumably until wrong-thinking people showed up.

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