What Does “Keeping the General Price Level Stable in Some Sense” Mean for Policy Makers Today?

What does “keeping the general price level stable in some sense” mean for policy makers today? It certainly does not mean complete price-level stability. The shift from inelastic commodity money to elastic paper money was consummated precisely in order to allow the constant expansion of the money supply, and, as we have seen and as is not contested by the mainstream, this will lead to an ongoing decline in money’s purchasing power. Today’s macroeconomic consensus maintains that this is helpful for growth. In the preceding chapters we saw that this is not the case. Be that as it may, a too-rapid decline in money’s purchasing power is deemed undesirable, and good money is thus defined as money whose purchasing power diminishes constantly but at a moderate pace. Most major central banks now define price level stability as constant inflation of around 2 percent per annum.

In some way, the fixation with the price level is understandable if we consider that accelerating inflation and ultimately hyperinflation is an inherent risk in any paper currency but logically impossible in commodity money systems such as proper gold standards. As we will see in the next part of our investigation, every paper money system in history has, after some time, experienced rising inflation, and no paper money system in history has survived. Either a voluntary return to commodity money was accomplished before a complete currency meltdown occurred, or the system collapsed in hyperinflation and economic and social chaos. We are frequently told that this time is different. Policy makers assure us that they have learned the lessons of history and will now pay close attention to the inflation rate. Thus, we may appreciate why the price level has achieved such extraordinary importance in policy debates. This focus, however, has been the source of new and dangerous fallacies.

—Detlev S. Schlichter, Paper Money Collapse: The Folly of Elastic Money, 2nd ed. (Hoboken, NJ: John Wiley and Sons, 2014), 160-161.