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Should Government Stabilize the Price Level?

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11/04/2014

Below, Rothbard explains that one reason given in support of a government-regulated monetary system is that it would allow for imposed stability of prices.   Rothbard explains why “stabilization” in prices is a misguided program. He wrote this in What Has Government Done to Our Money in 1963, so the context of the discussion of commodity money was quite different from what it is today.  The passage of time may at least partially explain why many commenters on the topic, including some who have submitted articles to us for publication, claim that one of the chief benefits of commodity money is greater stability in prices. This is, of course, a reversal of the older assumption that commodity money was less stable. Yet, whether commodity money is more or less stable is beside the point. The price level is a function of the market place, and prices changes are always “optimal” as explained here by Mateusz Machaj.  Government interference in the price level, on the other hand, leads to shortages, gluts, and business cycles. Rothbard writes:

Some theorists charge that a free monetary system would be unwise, because it would not “stabilize the price level,” i.e., the price of the money-unit. Money, they say, is supposed to be a fixed yardstick that never changes. Therefore, its value, or purchasing power, should be stabilized. Since the price of money would admittedly fluctuate on the free market, freedom must be overruled by government management to insure stability. Stability would provide justice, for example, to debtors and creditors, who will be sure of paying back dollars, or gold ounces, of the same purchasing power as they lent out.

Yet, if creditors and debtors want to hedge against future changes in purchasing power, they can do so easily on the free market. When they make their contracts, they can agree that repayment will be made in a sum of money adjusted by some agreed-upon index number of changes in the value of money. The stabilizers have long advocated such measures, but strangely enough, the very lenders and borrowers who are supposed to benefit most from stability, have rarely availed themselves of the opportunity. Must the government then force certain “benefits” on people who have already freely rejected them? Apparently, businessmen would rather take their chances, in this world of irremediable uncertainty, on their ability to anticipate the conditions of the market. After all, the price of money is no different from any other free prices on the market. They can change in response to changes in demand of individuals; why not the monetary price?

Artificial stabilization would, in fact, seriously distort and hamper the workings of the market. As we have indicated, people would be unavoidably frustrated in their desires to alter their real proportion of cash balances; there would be no opportunity to change cash balances in proportion to prices. Furthermore, improved standards of living come to the public from the fruits of capital investment. Increased productivity tends to lower prices (and costs) and thereby distribute the fruits of 383 free enterprise to all the public, raising the standard of living of all consumers. Forcible propping up of the price level prevents this spread of higher living standards.

Money, in short, is not a “fixed yardstick.” It is a commodity serving as a medium for exchanges. Flexibility in its value in response to consumer demands is just as important and just as beneficial as any other free pricing on the market.

Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Send him your article submissions for Mises Wire and The Austrian, but read article guidelines first. Ryan has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.

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