Debt Erosion and the Market Process

Economic Affairs 34(3) 2014: 370-378

12 Pages Posted: 26 Jul 2013 Last revised: 1 Mar 2015

See all articles by Alexander William Salter

Alexander William Salter

Texas Tech University - Rawls College of Business; American Institute for Economic Research

Date Written: July 25, 2013


This paper explores the effects of debt erosion on the market process. Debt erosion is the attempt by government to lower the real value of its debt through the creation of unexpected inflation. In addition to the costs recognized by most economists, debt erosion through unexpected inflation can impair the price system’s ability to coordinate exchange activity and can result in costly capital misallocations. This is because the creation of unexpected inflation implies disequilibrium in the money market. To avoid the harm from such monetary shocks, this paper suggests a separation between money and state, enshrined in an explicit rule at the constitutional level.

Keywords: debt erosion, constitutional political economy, free banking, monetary constitution, monetary equilibrium theory, market process economics

JEL Classification: B53, E42, E52, E58, P16

Suggested Citation

Salter, Alexander William, Debt Erosion and the Market Process (July 25, 2013). Economic Affairs 34(3) 2014: 370-378. Available at SSRN: or

Alexander William Salter (Contact Author)

Texas Tech University - Rawls College of Business ( email )

Lubbock, TX 79409
United States


American Institute for Economic Research

PO Box 1000
Great Barrington, MA 01230
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