Austrians on Current Events: What Rothbard Would Have Thought about QE3

Austrians on Current Events: What Rothbard Would Have Thought about QE3
Profile photo of Murray N. Rothbard

Today, we inaugurate a regular feature in the articles section highlighting passages from the Austrian tradition relevant to current events. Besides conveying the diversity, richness, and wisdom of that tradition, we hope that our effort to seek guidance from the Austrian greats will help readers make better sense of contemporary debates.

Our first Austrian reading pertains to the prospect of a third implementation of quantitative easing, otherwise known as QE3. The possibility of this was raised by Ben Bernanke last week at his Humphrey-Hawkins testimony before the U.S. Congress. Though he subsequently backpedaled on the idea, if the US economy continues to perform at its current lackluser pace, it’d be no surprise if the Bernanke-led Fed were to seriously consider QE3.

Quantitative easing, of course, is nothing more than central bank speak for money printing. And here is what Murray Rothbard thought about the idea of increasing the money supply to generate economic growth.

– GB


We are now on the threshold of a great economic law, a truth that can hardly be overemphasized, considering the harm its neglect has caused throughout history. An increase in the supply of a producers’ good increases, ceteris paribus, the supply of a consumers’ good. An increase in the supply of a consumers’ good (when there has been no decrease in the supply of another good) is demonstrably a clear social benefit; for someone’s “real income” has increased and no one’s has decreased.[6]

Money, on the contrary, is solely useful for exchange purposes. Money, per se, cannot be consumed and cannot be used directly as a producers’ good in the productive process. Money per se is therefore unproductive; it is dead stock and produces nothing. Land or capital is always in the form of some specific good, some specific productive instrument. Money always remains in some­one’s cash balance.

Goods are useful and scarce, and any increment in goods is a social benefit. But money is useful not directly, but only in exchanges. And we have just seen that as the stock of money in society changes, the objective exchange-value of money changes inversely (though not necessarily proportionally) until the money relation is again in equilibrium. When there is less money, the exchange-value of the monetary unit rises; when there is more money, the exchange-value of the monetary unit falls. We con­clude that there is no such thing as “too little” or “too much” money, that, whatever the social money stock, the benefits of money are always utilized to the maximum extent. An increase in the supply of money confers no social benefit whatever; it simply benefits some at the expense of others, as will be detailed further below. Similarly, a decrease in the money stock involves no social loss. For money is used only for its purchasing power in exchange, and an increase in the money stock simply dilutes the purchasing power of each monetary unit. Conversely, a fall in the money stock increases the purchasing power of each unit.

David Hume’s famous example provides a highly oversimpli­fied view of the effect of changes in the stock of money, but in the present context it is a valid illustration of the absurdity of the belief that an increased money supply can confer a social benefit or relieve any economic scarcity. Consider the magical situation where every man awakens one morning to find that his monetary assets have doubled. Has the wealth, or the real income, of society doubled? Certainly not. In fact, the real in­come—the actual goods and services supplied—remains unchanged. What has changed is simply the monetary unit, which has been diluted, and the purchasing power of the monetary unit will fall enough (i.e., prices of goods will rise) to bring the new money relation into equilibrium.

One of the most important economic laws, therefore, is: Every supply of money is always utilized to its maximum extent, and hence no social utility can be conferred by increasing the supply of money.

Some writers have inferred from this law that any factors devoted to gold mining are being used unproductively, because an increased supply of money does not confer a social benefit. They deduce from this that the government should restrict the amount of gold mining. These critics fail to realize, however, that gold, the money-commodity, is used not only as money but also for nonmonetary purposes, either in consumption or in production. Hence, an increase in the supply of gold, although conferring no monetary benefit, does confer a social benefit by increasing the supply of gold for direct use.

From: Man, Economy, and State, Chapter 11, Section 4

  • George Bragues

    I don't disagree, Jerrold. To start off Rothbard's take on QE3, though, I figured it'd be better to excerpt one of his more general theoretical statements about the lack of a relationship between money supply and economic growth. In future iterations of this feature, it would be a good idea — as you suggest — to highlight a more detailed assessment of his where Rothbard emphasizes the winners and losers in society of an increase in the money supply.

  • Jerrold Arnowitz

    I believe that Rothbard would have been much more incisive and decisive about QE3. He would have demolished the use of it to attempt to "free up" bank lending in today's recession and would have explained how the purchase of more toxic assets by the Fed from the banks would only benefit the banks just as the previous attempts to free the credit crunch by QE1 and QE2 failed. This article requires a more definitive expose of the fundamental flaw of Quantitave Easy to the general public. In other words the article should not only state Rothbard's basic explanation of the neutrality of monetary policy but a more rigorous explanation of how it adversly effects the consumer and only benefits the banks who reap the benefits and intentional withold the downline benefits from the public at large.

Profile photo of Murray N. Rothbard

Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an economist, economic historian, and libertarian political philosopher.

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