Inflation Principle

A money is often presumed to change in purchasing power in proportion to the demand for goods that it represents. In other words, with twice the amount of money each unit of the money will trade for half its previous amount of goods, as the increase in goods implies lower demand for them. This is a proportional relationship between monetary inflation and price inflation (or deflation). The money relation is an expression of the law of supply and demand.

• Rising supply market money, such as Gold and early Bitcoin, consumes the same value in goods as it creates in new units - including the opportunity cost of the capital invested in doing so. As such it produces no change in proportionality and therefore no price inflation.

• Monopoly money is not subject to competitive production, allowing its producer to obtain a monopoly premium in the pricing of new units. As such it increases the proportion of money to goods, resulting in price inflation.

• Falling supply market money, such as late Bitcoin, consumes no goods in the destruction of existing units. As such it decreases the proportion of money to goods, resulting in price deflation.

With market money, consumption of goods in production occurs during production. With monopoly money the production discount of seigniorage manifests as an uneven tax. As the new supply is introduced the tax is lower for earlier trades, with prices increasing over time.

The presumption of proportionality refers to the goods "represented" by a money. If there was only one money, this would be a straightforward relation to all goods. However the relation must be addressed in the case of multiple monies. The goods represented by a money are those that are traded for it. In other words, the relation assumes constant demand for the money.

Yet demand does not remain constant in the case of a decision to mine. New demand for the money is created by the fact of mining. The miner trades (consumes in production) additional "representation" capital for the money. The new money is entirely offset by the demand increase, represented by the consumed goods. Therefore proportionality is preserved in the case of multiple monies.

The generalization of this principle applies to all goods. In other words, economic growth is not price-inflationary in a free market.

Changes in the supply of money must necessarily alter the disposition of vendible goods as owned by various individuals and firms. The quantity of money available in the whole market system cannot increase or decrease otherwise than by first increasing or decreasing the cash holdings of certain individual members.

Mises: Human Action

This implies that all new money reduces existing “cash holdings” (specifically the monetary value). Yet this is not the case with market money. The creation of it first reduces “property holdings”, increasing the demand for “vendible goods” proportionally.