Home > libertarian > On inflation

On inflation

Sauvik writes a Keynes-bashing post in his latest Antidote.

I think I finally understand how inflation works after reading this snippet:

For example, let us take Richard Cantillon’s “Essay on Commerce” published in 1730, about 50 years prior to Adam Smith’s Wealth of Nations.

There is a chapter in Cantillon’s book entitled “On the increase and decrease in the quantity of hard money in a State.” Money was “hard” in 1730, and Cantillon discusses the effects of an increase in the quantity of gold.

Cantillon begins by saying:

“If Mines of gold or silver be found in a State and considerable quantities of minerals drawn from them, the Proprietors of these Mines, the Undertakers, and all those who work there, will not fail to increase their expenses in proportion to the wealth and profit they make: they will also lend at interest the sums of money which they have over and above what they need to spend.

All this money, whether lent or spent, will enter into circulation and will not fail to raise the price of products and merchandise in all the channels of circulation which it enters.”

But Cantillon does not stop here. He goes on to say who will lose and who will gain from this inflation. This is a very important point: that there will be losers too in this process. Cantillon refers to John Locke having “clearly seen that the abundance of money makes everything dear, but he has not considered how it does so. The great difficulty of this question consists in knowing in what way and in what proportion the increase of money raises prices.” It is Cantillon who was the first classical liberal to elucidate this process. He says:

“If the increase of actual money comes from Mines of gold or silver in the State the Owner of these Mines, the Adventurers, the Smelters, Refiners, and all the other workers will increase their expenses in proportion to their gains. They will consume in their households more Meat, Wine, or Beer than before, will accustom themselves to wear better cloaths, finer linen, to have better furnished Houses and other choicer commodities. They will consequently give employment to several Mechanicks who had not so much to do before and who for the same reason will increase their expenses: all this increase of expense in Meat, Wine, Wool, etc. diminishes of necessity the share of the other inhabitants of the State who do not participate at first in the wealth of the Mines in question. The altercations of the Market, or the demand for Meat, Wine, Wool, etc. being more intense than usual, will not fail to raise their prices. These high prices will determine the Farmers to employ more Land to produce them in another year: these same Farmers will profit by this rise of prices and will increase the expenditure of their Families like the others. Those then who will suffer from this dearness and increased consumption will be first of all the Landowners, during the term of their Leases, then their Domestic Servants and all the Workmen or fixed Wage-earners who support their families on their wages.”

Advertisements
Categories: libertarian Tags: , ,
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: