Inflation Principle

A money is 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). This 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, fully-offsetting consumption occurs during production. With monopoly money the production discount of seigniorage manifests as a 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 can be traded for it. In other words, the relation implies demand for goods in 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 consumes "representation" goods in producing the money. The new money is entirely offset by the implied demand increase represented by the consumed goods. Therefore proportionality is preserved in the case of multiple monies as well. 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 statement asserts that new money first affects existing money holdings. Yet this is not the case with market money. Its creation coincidentally reduces goods holdings as it increases money holdings. The increased demand for money is concurrently and proportionately offset by its increased supply. This reduction of goods cannot be ignored in evaluation of the money relation. The statement conflates market money with monopoly money, as the latter does not consume its value in goods through production. Given that the goods are consumed in essentially the same location as money is produced, and at the same time, not even an uneven outcome can be assumed.

This error persists despite explicit recognition that mining consumes in goods the value that it produces in new money.

The fact that the owners of gold mines rely upon steady yearly proceeds from their gold production does not cancel the newly mined gold's impression upon prices. The owners of the mines take from the market, in exchange for the gold produced, the goods and services required for their mining [...]. If they had not produced this amount of gold, prices would not have been affected by it.

If they had produced something other than gold, there would have been an actual effect on the money relation, to the extent that more in goods are produced than consumed (economic growth). But given that they produced money, in proportion to this growth, there is no change to the money relation. In other words, the above conclusion is perfectly reversed. The money relation is unchanged by money production, and as such no net effect on prices is implied. This error then infects dependent theories.

As against this reasoning one must first of all observe that within a progressing economy in which population figures are increasing and the division of labor and its corollary, industrial specialization, are perfected, there prevails a tendency toward an increase in the demand for money. Additional people appear on the scene and want to establish cash holdings. The extent of economic self-sufficiency, i.e., of production for the household's own needs, shrinks and people become more dependent upon the market; this will, by and large, [p. 415] impel them to increase their holding of cash.

In other words, the increase in goods (economic growth) changes the money relation in the absence of new money.

Thus the price-raising tendency emanating from what is called the "normal" gold production encounters a price-cutting tendency emanating from the increased demand for cash holding. However, these two opposite tendencies do not neutralize each other. Both processes take their own course, both result in a disarrangement of existing social conditions, making some people richer, some people poorer. Both affect the prices of various goods at different dates and to a different degree. It is true that the rise in the prices of some commodities caused by one of these processes can finally be compensated by the fall caused by the other process. It may happen that at the end some or many prices come back to their previous height. But this final result is not the outcome of an absence of movements provoked by changes in the money relation. It is rather the outcome of the joint effect of the coincidence of two processes independent of each other.

This is a refutation of the idea of money creation as a "stimulus" to growth, which is correct. Yet it incorrectly assumes money demand and money creation are independent processes. They are explicitly dependent as expressed in the money relation and the law of supply and demand upon which it relies. Stimulus is a reversal of cause and effect, properly refuted, yet it is an error to both accept the money relation and reject it.

Prices also rise in the same way if [...] the demand for money falls because of a general tendency toward a diminution of cash holdings. The money expended additionally by such a "dishoarding" brings about a tendency toward higher prices in the same way as that flowing from the gold mines [...]. Conversely, prices drop when the supply of money falls [when] the demand for money increases (e.g., through a tendency toward "hoarding," the keeping of greater cash balances).

This statement is based on the error of assuming that market money is price inflationary. It is therefore unproven by it. Money prices for a good rise due to increasing demand for that good. Yet the money relation pertains to all goods demanded in the money. As such, absent a change in the amount of goods, the increase in money demand for one good implies a reduction in that for others. This truth is explicitly recognized by the money relation itself, on which the statement relies.

As such no net change in the money relation is implied by hoarding money. Increased hoarding implies higher time preference, which is the ratio of hoarded capital to loaned capital (capital ratio), reflected as the interest rate. This is increased time value, not increased capital value. All money is always held by someone.

The only change to the purchasing power of money arises from a change to the actual money relation, which is the ratio of the amount of money to the demand for goods in that money. More goods is economic growth. In the case of market money, growth is offset by money production, maintaining the money relation. Independent of economic growth (or contraction), a change in demand for the money implies only a proportional change in demand or ability to obtain goods with the money, as opposed to in another money or by barter.

The ability to obtain goods with a money is a reflected by the level to which the money is accepted in trade. A money exhibits monetary value only in its ability be directly or indirectly exchanged for things with use value, as directly implied by the money relation itself.