Deflation has a bad name among today’s economists, and this should be your first clue that it might be something good. These educated Keynesians, as we’ve seen, can’t see a bubble until it explodes in their faces, at which time their zombie economy starts to wobble and nightmare possibilities abound, the worst being “it” might happen, as it did in the 1930s. They immediately turn to god (the FED chair) and pray that he or she will do what is right. As we know, Ben Bernanke built his reputation making sure "it" doesn’t happen here.
In a speech delivered in circa 1976 and reprinted in The Rothbard Reader, Murray Rothbard gives us a different view of deflation. First, what is it? Deflation is falling prices, he says, veering for the sake of discussion from the usual Austrian school definition as a contraction in the supply of money. Even Bernanke could accept deflation defined as falling prices. What he doesn’t accept is another assertion of Rothbard’s: The trend in an unhampered free market economy is usually a falling price level. It’s the unhampered part Bernanke can’t digest. Unhampered would mean no FED, no FDIC, freedom of people to choose the money they wish to use — the usual unthinkable conditions for Keynesians.
Rothbard could think of those things quite naturally. Falling prices are “glorious effects” of a robust free market, “even in the face of our general inflationary trend.”
For example, TV sets on which in 1948 it was almost impossible to see the image, then cost something like $ 2,000. And now [in 1976] they are infinitely better in quality and cost about $ 100.00. So that if you look at the price per unit quality of TV sets and think of that in contrast to the general price level, there is a tremendous and magnificent deflation— if you want to use that term for TV sets. I think this deflation is a great thing. This is the way real income increases and should increase. The same thing happened to penicillin, which started out when first discovered with its price so high that it was only available to extremely wealthy people. Now, of course, it is used for almost every nosebleed.
Rothbard notes short-run aspects of deflation. How about hoarding? Again, what is it exactly? Keynesians use it as a smear term, but he thinks hoarders are people who want to increase the real value of their cash balances. Who wouldn’t want to do that?
Another point: Deflation, he says, “sugarcoats the pill of recession.” In the 1930s unemployment hit 25%, but people who still had jobs — the 75% — saw the power of their dollars rise. People could buy ordinary consumer goods at new low levels. Rothbard’s family bought all their furniture during the depression.
Deflation and fraudulent banking
Another advantage of deflation is its potential to wipe out the fractional reserve banking system.
When the public cottoned onto [the bankruptcy of the fractional reserve banks] in 1931, 1932, and 1933 and the banking system was in the process of being smashed in every state of the Union, that was a great and glorious day for those of us who are hard-money people. . .
But then Roosevelt came into office, declared a bank holiday, and established the FDIC which bailed out the banks. If not for the Federal Deposit Insurance Corporation, "deflation could finally and at long last smash the fractional reserve banking system." The public knew it was a fraud so it would only be a matter of months “and the deed would have been done.” The system that was the source of a raft of evils including inflation, special privilege, and the business cycle, not to mention war, would have been sent to its grave.
Alas, Roosevelt spared the bankers instead of the public.
The presence of the Bill of Rights in the Constitution, Rothbard argues, shows that Americans don’t trust the government, and this is no less true when it comes to government-managed money. He reminds us that the state is “inherently an inflationary instrument.” Why is this so? First, government operations are wasteful and serve bureaucrats rather than consumers. It taxes (steals) wealth directly but there exists a line somewhere it dare not cross. So how does the state pay for expenditures it cannot pay with tax receipts? It turns to counterfeiting.
To counterfeit and get away with it, the state had to dress it up as monetary policy conducted by an “independent” central bank run by monetary scientists trained at the best universities. Yet, almost no one sees the FED as a counterfeiter. Certainly not your bought standard-issue economist. In the mainstream such a notion is outrageous, or at least not politically correct. But even Bernanke came clean in his infamous deflation speech of 2002:
The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.
What do you call someone who can “produce as many dollars as he wishes at essentially no cost”? Raise your hand if you like higher prices for the goods and services you purchase.
Rothbard wants to do away with the government’s monopoly control of money and believes it will require a mass movement from below to accomplish it.
Because of widespread insouciance, I believe the mass movement possibility will have to wait until the government creates a financial and economic catastrophe it can’t patch up. And that won’t be long in coming.