The Definition of Inflation According to Mises: Implications for the Debate on Free Banking

Abstract

The discussion of what is and what is not inflation has become important among the Austrian economists in their debate regarding free banking with fractional reserves versus banking with 100-percent reserve. Many Austrians also turn to the writings of Ludwig von Mises to find out what he himself considered to be inflation. The main intention is to find out if, in either system, free banking with fractional reserves or a 100-percent reserve, there could be cases of free market inflation. In particular, does any change in the quantity of money (in the broad sense) imply inflation?

There seems to be a lack of agreement among Austrians on what Mises thought about what is and what is not inflation. The present article does not deal with the fractional reserve controversy or with what we should consider to be inflation, but only with an interpretation of what Mises himself considered as inflation, with the hope that it will help to clarify what the Austrian dean thought of this term. The article shows the free banking versus 100-percent debate can do without the problem of inflation when defined as Mises does. The debate can focus on the different effects of changes in money supply or demand in each banking system without the need of defining the presence or absence of inflation.

Keywords: Mises, inflation, fractional reserve banking, free banking, 100-percent reserve

JEL Classification: B31, E31