Inflation for the Fearful Undergrad

Alec Haight
History of Financial Institutions and Markets
May 6th, 2015

Inflation for the Fearful Undergrad

The motive for choosing this topic rests on the anxiety I experience as an uninformed undergraduate student learning
about fractional reserve banking for the first time. Searching for enlightenment, I began studying What You Should
Know About Inflation by Henry Hazlitt1, and Money and Freedom, by Hans F. Sennholz2. These books provide
strong stances against the current monetary system in place, and raise fear in my chest, specifically when Sennholz
states strong claims such as, The Federal Reserve System must be abolished, and no one in government must be
permitted to exert influence on money matters.3
Hazlitts work does a great job in cutting the topic of inflation down to its roots, and is therefore the main basis of
introducing the topic in this paper. Money and Freedom exists to provide the reader multiple alternatives to the
current system, though its main goal is freedom of the money supply from government. However, while both of
these works seek to do away with fractional reserve banking, that is not the goal of this paper.
After studying these books, I wanted to analyze the current monetary system from another perspective. I utilized
knowledge from M & B 3, by Dean Croushore4 to present the fractional reserve banking in a neutral manner, and
explain the basic goals of the Federal Reserve Bank. I found some comfort in Ben Bernankes blog, former chair of
the Federal Reserve5, which explained banking policies outside the realm of monetary policy. Similarly,
MacroMania, a blog by David Andolfatto6, a vice president of the Federal Reserve Bank of St. Louis, presented
useful information for analyzing costs of inflation. Though the citation of other sources occurs throughout this paper,
the above listed provide a neutral stance and to serve to define or explain material at hand.
Through this writing, I aim to inform the uninformed of ways to analyze the current monetary system outside the
realm of totally abolishing the Federal Reserve. In doing so, I have left out many topics discussed in Hazlitts book
that require further research. These are namely the governments budget, the benefits of a gold system, and the
international effects of inflation. I instead focus on defining inflation, the reasons for central bank independence,
explaining the Federal Reserves inflation target and its credibility in maintaining it, and a few perceived costs of
inflation.

1 Hazlitt, H. (1960). What you should know about inflation. Princeton, NJ: Van Nostrand.
2 Sennholz, H. (1985). Money and freedom. Spring Mills, PA: Libertarian Press.
3 Sennholz, H. Page 9
4 Croushore, D. (2014). M & B 3 (Student ed.). Cengage Learning.
5 Bernanke, B. (2015, April 7). Should monetary policy take into account risks to financial stability? Retrieved May
7, 2015, from http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/07-monetary-policy-risks-to-financialstability

6 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel). Retrieved May 7, 2015, from
http://andolfatto.blogspot.com/2011/03/ron-pauls-money-illusion-sequel.html

Inflation Introduced
Henry Hazlitt cites the American College Dictionary to define inflation as Undue expansion or increase of the
currency of a country, especially by the issuing of paper money not redeemable in specie. 7 Hazlitt then continues,
When the supply of money is increased, people have more money to offer for goods. If the supply of goods does
not increase-or does not increase as much as the supply of money-then the prices of goods will go up.8 Providing an
accurate description for the effect inflation has on price-levels.
With a strong foundation set, Hazlitt then moves forward in his book laying out all the problems of inflation. Before
describing these, one must understand that inflation comes about when a party exercises control of the money
supply, as does the Federal Reserve Bank in the United States. A central banks independence from its government
says a lot about the level of inflation for a countrys currency.
Independence is Key
Many state that when the U.S. got off the gold standard, freedom went with it. Hazlitt quotes W. Randolph Burgess,
a chair of the executive committee of the National City Bank of New York, as saying Historically one of the best
protections of the value of money against the inroads of political spending was the gold standard. 9 This protection
Burgess and Hazlitt both speak of refers to the danger of the time sensitivity problem brought about by the political
business cycle.
A popular analogy used to understand this dilemma is consuming alcohol. In the short-run, one is tempted to have
one more drink. What he fights in making this decision is the longer-term effect of the alcohol. Relate this to the
political party in power with the goal of reelection. Low rates of unemployment better the chances of reelection. To
do this, it is very tempting to increase the monetary supply, which increases production (decreases unemployment)
in the short-run.10 Time sensitivity becomes a factor because now people have higher incomes and prices rise,
bringing about inflation due to this political agenda.11 A study done in 1993 by Alberto Alesina and Lawrence H.
Summers attempts to graph the relationship between central bank independence and inflation12:

7 Hazlitt, H. Page 1
8 Hazlitt, H. Page 2
9 Hazlitt, H. Page 25
10Croushore, D. Ch. 11 page 229 237.
11Croushore, D. Ch. 11 page 237 239.
12 Alesina, A., & Summers, L. (1990). Central bank independence and macroeconomic performance: Some
comparative evidence. Ohio State University Press.

Source: Alesina, A., & Summers, L. (1990). Central bank independence and macroeconomic performance: Some comparative evidence. Ohio
State University Press.

The graph shows an index of central bank independence on the x-axis, with 4.5 being most independent and average
inflation from 1955 1988 measured on the y-axis. A negative correlation appears on the graph, showing that as
central bank independence increases, the average inflation decreases. This data provides some proof for the
importance of central bank independence, and gives reason for claims of a free money supply.
While the Federal Reserves mandate provides it the independence necessary to maximize employment and stabilize
prices,13 some question its independence based on Congress ability to change its responsibilities, and that the
President of the United States appoints the Board of Governors and the Chairman. It remains true that with the
fractional reserve banking system the American citizens place their trust in the credibility of the Federal Reserve.
While the Federal Reserves record of credibility has improved, Hazlitt still warns that these monetary managers
have always fooled you in the past.14
The Inflation Target
In the opening chapters of What You Should Know About Inflation, Hazlitt identifies all of the evils of inflation, and
goes on to explain them in-depth in later chapters. The summaries of these are:
It is harmful because it depreciates the value of the monetary unit, raises everybodys cost of living
wipes out the value of past savings, discourages future savings, redistributes wealth and income
wantonlyand corrupts public and private morals.15
Though this type of language seems harsh, the above can be true for volatile, unexpected, and large amounts of
inflation. The idea of an inflation target begins on the belief that low, stable inflation does not result in the extremes
discussed in the quote above.
Many economists today would state that nobody likes inflation; it is a matter of costs versus benefits. Monetary
Policy Strategy, written by Frederic S. Mishkin16provides insight on the optimal level of inflation. He cites the
meaning of price stability as, the rate of inflation that is sufficiently low so households and businesses do not have
to account for it in everyday decisions. Research concludes that this long-term low level of inflation cycles between
1 and 3 percent,17 and is the lesser evil of the alternatives.
One alternative, a long-term level of inflation that is equal to zero percent, has possible unwanted results. Mishkin
explains the main reason against this long-term goal is that it makes the economy susceptible to deflation
something that, at extreme measures, is just as bad for the economy.18 In order to guard the economy from deflation,
the number the Federal Reserve targets is a 2 percent rate of inflation. Remember that this is long-term, so
fluctuations can occur where the economy experiences brief amounts of deflation. This section does not seek to
argue for or against 2 percent inflation, but to instill credibility in the Federal Reserve for maintaining this target
rate.
Tell Henry Hazlitt that the Federal Reserve and its money managers aim for this and he would be skeptical, based on
a, distrust of the money managers and of the fiscal policies of government. 19 Throughout the 1960s and 1970s
this 2 percent goal was not very realistic, but since the mid 1980s the Federal Reserve has become a little more
credible, as shown in the graph below.

13 What are the Federal Reserve's objectives in conducting monetary policy? (n.d.). Retrieved May 7, 2015, from
http://www.federalreserve.gov/faqs/money_12848.htm

14 Hazlitt, H. Page 30
15 Hazlitt, H. Page 18
16 Mishkin, F. (2007). Monetary policy strategy. Cambridge, Massachusetts: MIT Press.
17 Mishkin, F. (2007). 19.8.2 page 522
18 Mishkin, F. (2007). Some negatives of deflation: It is risky for debt with foreigners, it increases real
indebtedness, deteriorates balance sheets and causes financial instability, and presents a zero lower bound
problem, which makes it hard to fix the economy.

19 Hazlitt, H. (1960). Page 29

Source: Croushore, D. (2014). M & B 3 (Student ed.). Cengage Learning. Page 400

The above graph provides vertical blue sections representing recessions in the U.S. economy. Inflation presents an
important topic when thinking about the recent recession and the Federal Reserves efforts to stimulate the economy.
The graph below displays inflation expectations throughout this time.

The date range in this graph is from 2008 to 2014, and shows the consumer price index in green, inflation
expectations for the next five years in blue, ten-year inflation expectations in red and the thirty-year expectations in
orange. Through all the quantitative easing during the recession, inflation expectations remain relatively stable
around 2 percent. If one takes the ten-year expectations and subtracts the five-year expectations, the expectations for
years six through ten remain, as shown in the graph below.

The date range here is from 2007 to 2014, and the vertical green and red lines represent the quantitative easing
efforts of the Federal Reserve during the recession. Whenever expectations were below 2 percent, the Federal
Reserve initiated expansionary measures, as shown by the vertical green lines. Once these expectations rose above
2.5 percent, the red lines show the Federal Reserve initiating contractionary measures. While arguments still exist on
whether or not this inflation target is the correct method for the money supply, this data suggests that the Federal
Reserve does attempt to remain credible in hitting the inflation target.
Up to this point, this paper has defined inflation, provided the importance for central bank independence relative to
inflation, and identified the inflation target for the last thirty years. With this knowledge, it is now time to move into
a discussion on the costs of inflation.
Costs of Inflation
Though many see stable inflation as the policy providing the best cost versus benefits structure, it comes with the
perceived costs of: financial instability, a question of morals, and decreased purchasing power.
Financial Instability
Within the topic of financial instability is consumer debt and consumer saving. This section exposes the reader to the
concern of increased consumer debt, and provides insight to tools the Federal Reserve has to combat it. The section
then concludes with a brief explanation of consumer savings, something Hazlitt identified as diminished by
inflation.

Consumer Debt
Financial instability comes about when individuals take on too much debt for their respective incomes. Low interest
rates, a common result of Federal Reserve expansionary policy, make it tempting to take on more debt. In Brian M.
McCalls book, The Church and the Usurers, he explains just how popular debt has become:
The growth of the credit market can also be seen in the proliferation of new lenders. Payday lending, for
example, was nonexistent thirty years ago, but by 2005 there were over twenty thousand payday loan
retail outlets nationwide, more than McDonalds, Burger King, Sears, J.C. Penney, and Target Stores
combined. Debt seems to be our most popular consumer product!20
This leads to a changed image of borrowing, with much thanks to the Federal Reserve. In Jarret C. Oeltjens book,
Pawnbroking on Parade, he explains that borrowing was no longer a stigma, a sign of poverty, or financial
mismanagement. Rather borrowing became the American way to instantly raise ones standard of living. 21 This new
enthusiasm resulted in an explosion of the credit market, and an increase in the financial instability of American
citizens.
Arguments that support the Federal Reserve often say, How would the market have looked otherwise? The graph
below shows a trend of GDP and two cyclical lines: one showing a stabilizing policy and the other showing a neutral
policy. The main point to draw from this is that interest rates are going to fluctuate no matter what; it is just a
question of how much.

Source: Croushore, D. (2014). M & B 3 (Student ed.). Cengage Learning. Page 359

The Federal Reserves goal in its stabilizing policy is to rotate tightly around that trend line, as shown in the purple
line above. If this is accomplished, the problem of risky consumer credit slightly diminishes. This is preferred to the
more cyclical red line, presenting a neutral policy. The graph below provides real data that the Federal Reserve has
done a decent job at this in the last thirty years.

20 McCall, B. (2013). The church and the usurers: Unprofitable lending for the modern economy. Ave Maria, FL:
Sapientia Press. Page 2

21 McCall, B. Page 3

Source: Andolfatto, D. (2014, June 19). How far are we from trend? Retrieved May 7, 2015, from http://andolfatto.blogspot.com/2014/06/howfar-are-we-from-trend.html

While the data has been common sized, the important conclusion to draw is that since 1985, the economy appears to
be stable. The drop-off of Real GDP/Population, shown in the solid red line, suggests the economy is entering a new
trend, given that Real GDP/Labor Force has remained more stable since 2008. Examining this data helps to lower
some anxiety, but it still does not deny that increased consumer credit poses a problem. The problem of financial
stability is an important one to the Federal Reserve, and it is always considering ways to promote it.
Monetary Policy and Financial Stability
In a post by former Federal Reserve Chairman Ben Bernanke, titled Should monetary policy take into account risks
to financial stability, he addresses the issue of financial stability and brainstorms the best ways to promote it.
Bernanke acknowledges the threat that persistently low nominal interest rates create risks to financial stabilityby
promoting bubbles in asset prices or stimulating excessive credit creation, 22 and that Monetary policy is far from
ideal23 when it comes to addressing the threats.
Bernanke explains that monetary policy is too blunt of a tool, due to its broad impact. He also argues against it
because it can only do so much before resulting in more harm than good. His argument then follows that it is
better to rely on targeted measures to promote financial stability, such as financial regulation and supervision,
rather than on monetary policy.24
During his time as chair, Bernanke and colleagues required large banks to hold more capital and to keep more cash
on hand, and began making regular use of stress tests to see if banks were strong enough to withstand very severe
economic and financial shocks.25 It is true that the Federal Reserve does more than print money, though supervision
and regulation are only the first line of defense against instability.

22 Bernanke, B. (2015, April 7). Should monetary policy take into account risks to financial stability? Retrieved May
7, 2015, from http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/07-monetary-policy-risks-to-financialstability

23 Bernanke, B.
24Bernanke, B. He addresses the idea of using the right tool for the job in his first speech as a Fed governor,
found here: http://www.federalreserve.gov/boarddocs/speeches/2002/20021015/default.htm

25 Bernanke, B.

Bernanke introduces Andrea Ajello, Thomas Laubach, David Lopez-Salido, and Taisuke Nakatas paper, Financial
Stability and Optimal Interest-Rate Policy, which evaluates the tradeoffs of policies conducted for financial
stability.26 In the baseline analysis of this study, Bernanke explains the authors found that:
Incorporating financial stability concerns might justify the Fed holding the short-term interest rate 3 basis
points higher than it otherwise would be[the authors] show that a larger response would not meet the
cost-benefit test in their estimated model. The intuition is thathigher rates do not much reduce the already
low probability of a financial crisis in the future, but they have considerable costs in terms of higher
unemployment and dangerously low inflation in the near-to intermediate terms. 27
The conclusion from this is that large increases in the short-term interest rate (used for financial stability) would
result in more costs than benefits. More research on this issue is needed, but the paper discusses in Bernankes blog
suggests that central banks should not change their rate-setting policies to mitigate risks to financial stability.
Bernanke knows this, and concludes his post by restating, central banks should focus their efforts on improving
their supervisory, regulatory, and macroprudential policy tools to promote financial stability.
This view asserts that the Federal Reserve uses more than its printing press to combat financial stability. Still,
Sennholz and Hazlitt would continually reject this system based on a preference for a system that protects the
monetary system from influence of governments.28
Consumer Saving
Apart from borrowers, financial instability also hurts savers. To present the idea, suppose everyone saves his or her
money under his or her mattress. This money earns no interest. In the meantime, imagine the Federal Reserve keeps
inflation at 2 percent. The saver is therefore losing money each year, as inflation decreases the purchasing power
of that money under the mattress. Based on this idea, Hazlitt explains in more detail that inflation:
Steadily wipes out the value of dollar savings, of savings-bank deposits, of bonds, of mortgages, of
insurance benefits, of pensions, of fixed-income payments of every kind. It thereby penalizes and
discourages thrift and saving, discourages the safer and more conservative investments. 29
There is indeed an implicit tax on holding money because of inflation, but savers still must find ways to combat this.
In his blog MacroMania, David Andolfatto first reminds the reader that these major concerns of saving would be
valid if, many people are forced to save in the form of zero-interest cash; and if inflation is high and volatile.
Reassuring the reader that we are not in a regime like this (though these regimes have existed before) the author
continues that stable inflation results in savers to be accounting for this in their savings.
He continues in providing data that investing in stocks would have been preferred to investing in gold, 30 and
explains that nominally fixed pension benefits are generally indexed to inflation. The conclusion to inflation hurting
the savers depends heavily on the credibility of the Federal Reserve. As long as it maintains its goal of low, stable
inflation, the saver can account for it and act accordingly to prevent savings being wiped out.

26 Ajello, A., Laubach, T., Lopez-Salido, D., & Nakata, T. (2015). Financial Stability and Optimal Interest-Rate Policy.
- The authors of this work use a model of the economy where monetary policy influences near-term job creation,
inflation, and the probability of a future, job-destroying financial crisis. More specifically, low interest rates are
assumed to stimulate rapid credit growth, which makes a crisis more likely. The authors perform many tests with
various assumptions and assess whether the benefit of keeping rates meaningfully higher than they otherwise
would be (reducing the risk of a future financial crisis) exceeds the cost of higher rates (lower near-term job growth
and inflation below target).

27 Bernanke, B.
28 Sennholz, H. Page 69
29 Hazlitt, H. Page 144
30 Andolfatto, D. (2011, February 10). Is gold a good store of value? Retrieved May 7, 2015, from
http://andolfatto.blogspot.com/2011/02/is-gold-good-store-of-value.html

A Question of Morals
In Hazlitts work, the debt capacity of the government is the main question of morals. Though this topic yields much
debate, this section focuses on morals as it relates to the idea that inflation never affects everybody equally. Hazlitt
points this out through the following example:
When the government puts more money into circulation, it may do so by paying defense contractors, or by
increasing subsidies to farmers or social security benefits to special groups. The incomes of those who
receive this money will go up first. Those who begin spending the money first buy at the old level of prices.
But their additional buying begins to force up prices. Those whose money incomes have not been raised are
forced to pay higher prices than before; the purchasing power of their incomes has been reduced.31
Again, the expression here is that inflation benefits one group at the cost of another, which is immoral. The
efficiency of markets is in question with this topic when one debates on just how fast those prices across the
economy will rise. Additionally, one might argue that even on a gold standard, those who mine the gold are the first
to benefit, and this effect still exists. However, a true analysis of this idea must start with the method of inserting
money into the economy.
David Andolfatto addresses this theory directly by first identifying it as one of conspiracy.32 This theory, he argues,
makes it sound like the Fed simply hands out cash to peopleThe Fed is not permitted to hand out cash in
exchange for nothing in return. When the Fed creates new money, it uses the new money to purchase assets from
another party. The Fed engages in asset swaps; there are no helicopter drops. 33 If one does not understand an asset
swap, it is tough to agree fully on this argument. Two things to understand are that 1) When the Federal Reserve
purchases assets, these assets mature, essentially swapping the money back out of the economy and 2) The only
profit given to the Treasury is the interest charged on these swaps. 34
The main idea here is that whatever money enters the economy eventually exits the economy, with the exception of
the interest payments. The government does profit off this interest, as well as the seigniorage revenue. 35 However, a
study done by the Federal Reserve Bank of St. Louis shows seigniorage as a very small portion of the governments
income.36 Any further entertainment of this topic enters the reader into a discussion on the governments debt policy
and remains out of the content in this paper, which provides the reader a rounded foundation to move forward.
Decreased Purchasing Power
An earlier section of this paper described the Federal Reserves goal of keeping inflation around 2 percent. While
there are many schools of thought on this, Henry Hazlitt addresses this directly by citing Dr. Winfield Riefler that
this would be equal to an erosion of the purchasing power of the dollar by about one-half in each generation.37
This erosion of purchasing power is a concern many against inflation bring to the table. The display of the following
graph is common to appear in these talks:

31 Hazlitt, H. Page 130

32 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel).
33 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel).
34Young, J. (2015, April 30). [Personal interview].
35 http://www.investopedia.com/terms/s/seigniorage.asp Investopedia defines this as The difference between the
value of money and the cost to produce itif the seigniorage is positive, then the government will make an
economic profit.

36 Neumann, M. (n.d.). Seigniorage in the United States: How Much Does the U. S. Government Make from Money
Production?

37 Hazlitt, H. Page 86

Source: Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel). Retrieved May 7, 2015, from
http://andolfatto.blogspot.com/2011/03/ron-pauls-money-illusion-sequel.html

The data shown plots the inverse of the price-level (measured by the consumer price index), which is nominalized to
$1.00 in 1948. It falls to about $0.11 in 2010, showing about a 4.6 percent annual rate of inflation. Let us now return
to David Andolfattos blog, where he then provides the following:

Source: Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel). Retrieved May 7, 2015, from
http://andolfatto.blogspot.com/2011/03/ron-pauls-money-illusion-sequel.html

The data displayed above plots the purchasing power of the USD where purchasing power is measured in terms of
labor, rather than goods. The conclusion to draw here is that one needs more money today than in 1948 to purchase
one hour of labor. Andolfatto puts it another way, that the average nominal wage rate in the U.S. has increased by a
factor of 25 since 1948.38 Arguments such as these are ones that get people into trouble, since they are considering
nominal variables.39 The next step is to place these nominal prices (the first graph) in relation to nominal incomes
(the second graph).

38 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel).

39 http://www.investopedia.com/terms/m/money_illusion.asp Investopedia explains that, if you are only
considering the nominal variables, you are susceptible to money illusion an economic theory stating that many
people have an illusory picture of their wealth and income based on nominal dollar terms, rather than real terms.

Source: Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel). Retrieved May 7, 2015, from
http://andolfatto.blogspot.com/2011/03/ron-pauls-money-illusion-sequel.html

Here, one can see that the consumer price index (in red), has increased by a factor of about 10 since 1948. Examine
the blue line, the nominal wage rate, and one can see that it has increased by a factor of about 25.40 The author states,
This implies that the real wage (nominal wage divided by the price-level) has increased by a factor of 2.5 since
1948.41 In other words, labor is able to purchase or produce more goods and services than before. Continuing on,
Andolfatto shifts his focus to looking at labors share of income (GDP):

Source: Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel). Retrieved May 7, 2015, from
http://andolfatto.blogspot.com/2011/03/ron-pauls-money-illusion-sequel.html

Supporting the argument of money neutrality42, the chart above shows that, in times of high and low inflation, there
has been no whittling of the share of income accruing to labor. It is so stable that one might suggest there is no
relation between levels of inflation and the labor share of income.
Andolfatto then presents a quote from Ron Pauls book, End the Fed, We might say that the government and its
banking cartel have together stolen $0.95 of every dollar.43 Andolfattos argument is that 95 percent of the
outstanding stock of base money44 in the year 1913 is what has really been lost (not the value of the dollar created
yesterday). The author explains, This 1913 money stock constitutes a tiny fraction of our total wealth. Moreover,

40 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel). The author does note that, there is

considerable disparity in wage rates across members of the population. An argument we could be sure that Hazlitt
would propose when viewing these graphs.

41 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel).

42 http://www.investopedia.com/terms/n/neutrality_of_money.asp Investopedia defines this as An economic theory
that states that changes in the aggregate money supply only affect nominal variables, rather than real variables.

43 Paul, R. (2009). End the Fed (p. 25). New York, New York: Grand Central Pub.

since it has been in circulation for almost 100 yearsthe loss in its purchasing power has been spread over countless
individuals, agencies, and generations.45
The conclusion of his post ends in addressing the large amount of assets the Federal Reserve currently holds. He
asserts, If the Fed maintains its credibilitythen there is little reason to expect even a huge temporary increase in
the supply of base money to have an explosive impact on inflation.46 While Andolfatto states, There are legitimate
criticisms one could level at the monetary institutions of this country, he does not believe they are all a result of
inflation:
There are fundamental market forces at work in todays world that are causing return to labor, saving, and
entitlements to vary over timethere is good reason to believe that these fundamental or real factors are
much more consequential than the monetary or nominal factors emphasized by some people. 47
Conclusion
After defining inflation as essentially an increase in the nations money supply, the importance of central bank
independence appeared crucial to first combating inflation. From there, discussion of the targeting of a low, stable
level of inflation occurred as well as the Federal Reserves credibility in maintaining it. The identification of
financial instability as a perceived cost of inflation appeared as a problem that regulation, supervision, and
credibility could mitigate. An establishment of a foundation for future research on the distribution of new money
presented the reader grounds to move forward. Lastly, the purchasing power of the dollar in real terms aimed to rest
worries on the dollar losing value.
There are many schools of economic thought, and no matter the policy, there will always be critics. This paper
places a claim from one side, and offers an argument to that claim from the other side in order to provide the reader
knowledge from multiple angles. No matter the current policy, we are not dismissed from assuming responsibility
for our own intellect. Sennholz says it best, that any change in the monetary system must occur through
information, education, legislation, litigation, and demonstration.48

44 http://www.investopedia.com/terms/m/monetarybase.asp The monetary base is defined as currency plus

reserves. In contrast, broad money is the most inclusive definition of the money supply, explained here:
http://www.investopedia.com/terms/b/broad-money.asp.

45 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel).

46 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel).
47 Andolfatto, D. (2011, March 23). Ron Paul's Money Illusion (Sequel).
48 Sennholz, H. (1985). Page 78