Increasing credit with GDP

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    I found out recently that one of my friends that I assumed to be of the Austrian school of economic thought believes that we should increase the credit supply at the same pace that GDP increases. I have thought it through and I can’t seem to understand why somebody would believe this could help the economy. As Murray Rothbard said, “Thus, we see that while an increase in the money supply, like an increase in the supply of any good, lowers its price, the change does not–unlike other goods–confer a social benefit.” Are the advocates afraid of deflating prices? Do they not fear those who control the credit supply might abuse their power?


    Although I’ve never heard that particular view before, it sounds similar to the monetarist view of Milton Friedman who argued that the money supply should be increased at the same rate as the normal rate of increase in real GDP. As you surmise, the reason for such a policy is to prevent price deflation at least and to generate stable prices at most. Friedman did fear Fed officials having discretionary policy and so he argued for an automatic increase in the money supply of between 3-4 percent per year.


    I thank you for the answer. Now, to address monetarist policy, do they not think that markets can adjust to deflated prices in efficient manners?


    Monetary disequilibrium theorists argue that price deflation caused by increases in the supply of goods made possible by greater productivity is benign to the working of the market. But price deflation caused by an increase in the demand for money is not benign. The reason is prices are sticky downward in such a case. They think that monetary policy should keep the rate of increase in nominal GDP constant.

    Take a look at the article by George Selgin:

    This view has been criticized by Austrian economists:

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