[murphy560]

In Rothbard’s “Angel Gabriel” model (The Mystery of Banking pp. 45-47) Rothbard states: “Those lucky folks who rushed out the next morning, just as the stores were opening, managed to spend their increased cash before prices had a chance to rise; they certainly benefited. Those people, on the other hand, who
decided to wait a few days or weeks before they spent their money, lost by the deal, for they found that their buying prices rose before they had the chance to spend the increased amounts of money. In short, society did not gain overall, but the early spenders benefited at the expense of the late spenders. The profligate gained at the expense of the cautious and thrifty: another joke at the expense of the good Angel.”

I would argue that it is not the late spenders but the early sellers who are hurt in this process. Assuming that prices approximately double, after the effects of the doubling of the money supply have worked their way through the economy, the late buyers are left with double their original cash balance and prices that are generally twice what they originally were. They seem to be in the same position regarding their purchasing power. Is it not the early sellers who are selling their goods at a discount not yet knowing what the market price of their goods should be after the change in money supply?

[jmherbener]

Yes, to state the principle in general: those whose buying prices rise more than their selling prices over the period of inflation lose and those whose buying prices rise less than their selling prices over a period of inflation gain.

Rothbard is simplifying the calculation by assuming the money balances of the recipients remains the same during the period in which the late buyers are waiting to spend their new money. In fact, the money balances of people would begin to change as soon as the new money is spent and that would affect who winds up being a winner or losers in the process of inflation.

Remember that Rothbard’s point is not to trace out the complete effects of inflation, but merely to show that even a proportional and instantaneous increase in everyone’s money balances would not leave the pattern of real income the same in the market after the new money is spent.

[miljacic]

DMurphy, I actually (partially) disagree with your conclusion… bear with me for a second and judge if this sounds reasonable.

First, if Angel, together with the money left a note to each person saying: “here’s some money for you, and I did just the same for every person in this country”, then everyone will be aware of the new global situation, the next morning ALL the prices will automatically double, and noone will either gain or lose. The Angel’s overnight action will amount to exactly no effect.

But I guess the “Angel Gabriel” model assumes no such note, and so each person has no clue about what happened to others. OK. Then…

Since each and every person in economy is a “seller” in some way (for example a school teacher sells his time and effort and receives a salary), and at the same time each and every person is a “buyer” since he has that Angel’s extra money, all the people will, initially, be exactly the same: they will all have extra cash in their pockets AND the prices of what they all sell will stay the same.

With extra money people will buy more goodies, but not all the goodies equally. All tomato sellers might suddenly sell 5 times as much tomatoes, while schoolteachers (as a group) might not be suddenly asked to teach any new children, simply because no new children were suddenly born. Some teachers may actually lose their jobs because parents will use new money to move kids to better schools – they are sellers who now sell even less then before.

So what kind of persons will gain the most? The ones who spend Angel’s money the fastest (before prices rise), AND those lucky sellers who are getting that extra money via selling more. So ALL early buyers and SOME OF early sellers.

For example, some particularly lucky seller will sell 100 times more because of that Angel’s money. He will become rich no matter if he is quick or slow, whether the prices doubled or not yet.

And who will be the biggest loser? The one who didn’t spend Angel’s money, and whose sales did not increase so he wasn’t able to raise the price. He is both early and late seller.

So:
1. as a buyer – if you spend early you gain, if you spend late you don’t gain (not actually lose, just don’t gain).
2. as a seller – it depends on how much will your sales increase. You may lose or gain.

Conclusion:
Angel’s action will hurt the sellers who will sell less, the same, or more-but-not-enough then before, and will benefit everyone else. In the beginning this redistribution of capital will be large, then it’s amplitude will slowly decrease toward the new equilibrium.

[Author]

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