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Austrian Monetary Theory vs. Federal Reserve Inflation Targeting

One of the leading policy guideposts for central banks and many monetary policy proponents nowadays is the idea of “inflation targeting.” Several major central banks around the world, including the Federal Reserve in the United States, have set a goal of two percent price inflation. The problem is, what central bankers are targeting is a phantom that does not exist.

Perhaps we can best approach an understanding of this through an appreciation of some of the writings by members of the Austrian School of Economics on matters of monetary theory and policy. Carl Menger (1840-1921), the founder of the Austrian School in the 1870s, had explained in his Principles of Economics (1871) and his monograph on “Money” (1892), that money is not a creation of the State.

Money Emerges from Markets, Not the State

A widely used and generally accepted medium of exchange emerged “spontaneously” – that is, without intentional government plan or design – out of the interactions of multitudes of people over a long period of time, as they attempted to successfully consummate potentially mutually advantageous exchanges. For example, Sam has product “A” and Bob has product “B”. Sam would be happy to trade some amount of his product “A” for some quantity of Bob’s product “B”. But Bob, on the other hand, does not want any of Sam’s “A”, due to either having no use for it or already having enough of “A” for his own purposes.

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