Why the Fed's Accommodation of Money Demand Is Inflationary

Demand for a good is demand for the services the good renders, and money's service is exchange. People do not consume money. They hold it in order to spend it, and a general increase in the production of goods, which raises the demand for money, does not mean anyone plans to sit on a larger pile. Under barter, a butcher who wants tomatoes faces a vegetarian farmer who does not want his meat. Money dissolves that constraint.

Mises put the distinction in terms the doctrine cannot absorb:

The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power.

Apples are the test case for the absorption logic. In the apple market, a 5 percent increase in supply is met by a 5 percent increase in demand, and the extra apples are eaten. Supply is genuinely absorbed. Money has no equivalent. A 5 percent rise in the demand for money is a 5 percent rise in the demand for money's services, and services are not consumed the way apples are. An increase in supply meant to accommodate that demand is not taken out of the economy. It keeps circulating.

Circulation is the transmission link to the real economy. The essay does not trace the path of the new money in detail. Its conclusion is blunt: accommodation "will set in motion all the negatives that accompany it." Inflation by the Fed, the essay says, leads to boom-bust cycles and economic impoverishment, a sequence it ties to "inflationary increases of money and credit." On this reading, the flexible money the Insider commentary credits with decades of growth is the same money that finances the cycle's upswing.

Why Gold Needs No Manager

Gold, in the essay, is the money that needs no manager, and the gold profile follows how the market prices it. Once exchange settles on a commodity money as the medium of exchange, the existing stock is sufficient to deliver money's services, because those services run on purchasing power rather than on quantity. On the essay's logic, purchasing power is what adjusts as the economy grows, not the count of units.

In an unhampered market there is no such thing as too little or too much money. Any amount the market settles on does the job, and an increase in the supply of a commodity money does not carry the boom-bust menace of fiat expansion.

The accommodation doctrine treats money supply as a dial the Fed must keep turning. The essay's answer is that the market's own selection is always the correct quantity: "In an unhampered market without central bank interference, any quantity of a market-selected money will correspond to the correct amount and no one is required to monitor and control this quantity."