Monetary Inflation - Austrian View

Austrian View

The Austrian School maintains that inflation is always and everywhere simply an increase of the money supply (i.e. units of currency or means of exchange), which in turn leads to a higher nominal price level, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer assets and goods and services.

Given that all major economies currently have a central bank supporting the private banking system, money can be supplied into these economies by means of bank-created credit (or debt). Austrian economists believe that this bank-created credit growth (which forms the bulk of the money supply) sets off and creates volatile business cycles (see Austrian Business Cycle Theory) and maintain that this "wave-like" or "boomerang" effect on economic activity is one of the most damaging effects of monetary inflation. However, the Austrian theory of the business cycle varies significantly from mainstream theories with economists such as Gordon Tullock, Bryan Caplan, and Nobel laureates Milton Friedman and Paul Krugman having said that they regard the theory as incorrect.