Federal Reserve

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    Assuming all economists agree that money is not wealth and that creating money out of thin air (counterfeiting, even by the Fed) is not good for the economy, then why does the federal reserve continue to inflate the money supply?


    Businessmen tend to think that additional money is necessary to fund the expenditures of a growing economy. An insufficiently increasing money stock would choke off economic growth.

    Among mainstream economists, the main reason is the belief that price deflation is the cause of economic downturns. Ideally monetary policy would bring about stable money, neither price inflation nor price deflation. Since they believe that mild price inflation is not harmful, however, they advocate mild price inflation, like the Fed’s target of 2%, to avoid the possibility of the economy slipping into price deflation.

    Ludwig von Mises discusses inflationism (the businessman’s view) and monetary stability (the economist’s view) in chapter 7 of his book, The theory of Money and Credit:


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