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transform the exchange ratios between economic goods that are determined in the market can only be undertaken with the instruments of the market. It can never foresee exactly what the result of any particular intervention will be. It cannot bring about a desired result in the degree that it wishes, because the means that the influencing of demand and supply place at its disposal only affect the pricing process through the medium of the subjective valuations of individuals; but no judgment as to the intensity of the resulting transformation of these valuations can be made except when the intervention is a small one, limited to one or a few groups of commodities of lesser importance, and even in such a case only approximately. All monetary policies encounter the difficulty that the effects of any measures taken in order to influence the fluctuations of the objective exchange value of money can neither be foreseen in advance, nor their nature and magnitude be determined even after they have already occurred.

Now the renunciation of intervention on grounds of monetary policy that is involved in the retention of a metallic commodity currency is not complete. In the regulation of the issue of fiduciary media there is still another possibility of influencing the objective exchange value of money. The problem that this gives rise to must be investigated (in the following part) before we can discuss certain plans that have recently been announced for the establishment of a monetary system under which the value of money would be more stable than that of a gold currency.

7 Excursus: The Concepts Inflation and Deflation

Observant readers may perhaps be struck by the fact that in this book no precise definition is given of the terms inflation and deflation (or restriction or contraction); that they are in fact hardly employed at all, and then only in places where nothing in particular depends upon their precision. Only inflationism and deflationism (or restrictionism) are spoken of, and an exact definition is given of the concepts implied by these expressions. [11] Obviously this procedure demands special justification.

I am by no means in agreement with those unusually influential voices that have been raised against the employment of the expression inflation altogether. [12] But I do think that it is an expression that it is possible to do without, and that it would be highly dangerous, on account of a serious difference between its meaning in the pure economic theory of money and banking and its meaning in everyday discussions of currency policy, to make use of it where a sharp scientific precision of the words employed is desirable.

In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange value of money must occur If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange value of money did not alter could hardly ever exist for very long. The theoretical value of our definition is not in the least reduced by the fact that we are not able to measure the fluctuations in the objective exchange value of money, or even by the fact that we are not able to discern them at all except when they are large.

If the variations in the objective exchange value of money that result from these causes are so great that they can no longer remain unobserved, it is usual in discussions of economic policy to speak of inflation and deflation (or restriction,