DEFLATION

AND

LIBERTY

DEFLATION AND LIBERTY

JÖRG GUIDO HÜLSMANN

Copyright © 2008 Ludwig von Mises Institute

Ludwig von Mises Institute

518 West Magnolia Avenue

Auburn, Alabama 36832 U.S.A.

www.mises.org

ISBN: 978-1-933550-35-0

IT IS MY GREAT pleasure to see this little essay in print. Written and presented more than five years ago, it was welcomed at the time by scholars with a background in Austrian economics. However, it was not understood and was rejected by those who did not have this background. In order to reach a broader audience, a short essay would simply not do. I therefore decided not to publish “Deflation and Liberty” and started to work on The Ethics of Money Production, a book-length presentation of the argument, which has just become available from the Mises Institute.

THE TWENTIETH CENTURY HAS been the century of omnipotent government. In some countries, totalitarian governments have established themselves in one stroke through revolutions—apparently a bad strategy, for none of these governments exists any more. But in other countries, totalitarianism has not sprung into life full-fledged like Venus from the waves.

WHEN IT COMES TO matters of money and banking, all practical political issues ultimately hinge on one central question: Can one improve or deteriorate the state of an economy by increasing or decreasing the quantity of money?1

FROM THE STANDPOINT OF the commonly shared interests of all members of society, the quantity of money is irrelevant. Any quantity of money provides all the services that indirect exchange can possibly provide, both in the long run and in the short run. This fact is the unshakable starting point for any sound reflection on monetary matters.

WITH THESE STATEMENTS WE could close our analysis. We have seen that deflation is not inherently bad, and that it is therefore far from being obvious that a wise monetary policy should seek to prevent it, or dampen its effects, at any price. Deflation creates a great number of losers, and many of these losers are perfectly innocent people who have just not been wise enough to anticipate the event.

HOW WOULD MONEY BE produced in a free society? Let us first observe that the fact that the quantity of money is irrelevant for the wealth of a nation must not be confused with the ideal of stabilizing the quantity of money. The latter ideal is in fact a spurious ideal and does not follow from the aforementioned fact. There is nothing wrong with increases or decreases of the quantity of money. The point is that such increases or decreases should not be mistaken to benefit society as a whole.