The real cause of inflation: legal-tender laws explained by Guido Hülsmann

This argument is presented in detail in this excerpt from Hulsmann’s book “The Ethics of Money Production”.

Basically, austrian economists understand that the inherent cause of inflation stems from the over-expansion of money supply. Monopoly privileges for coins or banknotes reduce the menu of choices but do not inherently cause sustained inflation because market participants can still evaluate and reject debased or inferior money. Combined with legal tender privilege, the situation becomes dire though. As it is really the enforced legal-tender laws that enable large-scale inflation by forcing the acceptance of debased or fractional-reserve money substitutes. Legal tender privileges (but not legal monopoly) attack individual choice at its very root. Legal tender laws, but not asymmetric information, activate the Gresham’s law, in which the bad money drives out the good, as there are historical proof of that.

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