Reply To: A Policy of Deflation is Bad for Business


In the unhampered market, the production of money and money substitutes would be regulated by profit. If the PPM was anticipated by entrepreneurs to rise during economic progress, then they would produce more money to earn the profit. The increased production of money would moderate the rise in the PPM.

The classical gold standard of the nineteenth century permitted the issue of fiduciary media. Also, there were issues of silver money as well until the Gold Standard Act of 1900. Of course, price inflation and booms and busts occurred as a result.

Once the prices of the houses, for which mortgages are claims, collapses, then banks must judge whether it is wise to quickly renegotiate the terms of the mortgage to make it feasible to get the most payments possible. Whether they renegotiate or not depends in part on their anticipation of the restoration of housing prices. If they think the prices will rise again soon, they will be reluctant to renegotiate. This is another source of inefficiency introduced by government attempts to prop these prices up again through monetary inflation. Another factor is the likelihood of the homeowner to pay back the mortgage on the old or new terms.