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Monetary Freedom Instead of Central Banking – The Future of Freedom Foundation

Posted by M. C. on December 29, 2022

The boom-bust cycles of inflations and recession and the political use of money-creation to serve the deficit spending needs of governments will never be effectively and permanently ended until central banking has been ended. Monetary matters must be fully returned to the market process of competitive supply and demand.

by Richard M. Ebeling

The United States and most of the rest of the world are, once again, in the midst of an inflationary crisis. Prices in general are rising at annualized rates not experienced by, especially, the industrialized countries of North America and Europe for well over 40 years. More than 50 percent of the U.S. population is under 40 years of age, meaning that half of the people in the country have never experienced in their life time a period of rising prices such as is now occurring.Monetary central planning is no more desirable or workable than any other form of government central planning.
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It is not surprising, therefore, the shock that it has had for so many. There was a period of time in the late 1970s when price inflation, as measured by the Consumer Price Index (CPI), was going up at an annualized rate of nearly 15 percent. That was the highest since during the American Civil War, more than a hundred years earlier. So, the nearly 9 percent price inflation in the summer of 2022 was something totally new for the average American family.

Prices do not all rise by the same amount at the same time

It is worth keeping in mind that the headline CPI number is only a statistical averaging of a selected group of individual prices chosen to reflect the representative purchases of an “average” urban American family in terms of the goods purchased and their relative amounts in a hypothetical “basket” of items. Break that down into the subcategories of different goods and services, and many of these subgroups of goods have been registered as rising much more or noticeably less than the general CPI number. For instance, in August of 2022, fuel oil prices were almost 69 percent higher than a year earlier, while food prices in general were between 11 and 13 percent above where they were in August of 2021. Housing prices were “only” 6 percent above 12 months earlier.

But any way that it is looked at, this is a new experience for most Americans used to an average rise in prices of only 2 to 3 percent a year for much of the last four decades. It is one thing to be a bit irritated because something that cost, say, $100 last year costs $102 today. But it is another matter entirely when what cost $100 last year may now cost $133 or even $169. When that is happening not to just one or two or three significant items in a basket of purchased goods but to many or most of what is regularly being bought, “inflation” becomes a budgetary crisis for many families across the country.

Rising prices are the effect of an earlier monetary action

What is missed in all of this is that the general rise in prices is a symptom and not the cause of the problem. We all know that if we take someone’s temperature, the number registered on the thermometer indicating a fever is not the cause of that fever; it is merely telling us that person’s body temperature is above what is considered “normal.” It does not explain or answer what is behind the “read” on the thermometer.

Suppose that someone has a regular income of $1,000 and that he spends, say, $500 on commodity “x,” $250 on commodity “y,” and $250 on commodity “z.” If this is all the money at his disposal and he wants to increase his spending on commodity “y” to $300, then he must reduce his purchases by $50 on either commodity “x” or commodity “z,” or some reduced combination of the two. He might draw down previously accumulated cash holdings or borrow the $50 from someone else. But in the former case, there will be a point at which he has drawn down all his available cash, and he must therefore restrict his overall purchases to his regular $1,000 income. If he borrows the money, it means that the lender must reduce a loan to another borrower by $50.

Whether it’s an individual or a community of individuals, the total sum of money available to that person or group of individuals sets the maximum of dollars offered in exchange for desired goods and services, as a whole. Only if the number of dollars in the hands of that individual or community increases can the demand for and prices of one or more goods rise without some complementary decline in money demand for some other good(s). Overall “price inflation” cannot occur over any sustained period of time without a preceding or contemporaneous increase in the total amount of money in the economic community of buyers and sellers.

The gold standard served as a “check” on inflation

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