Rothbard: With Interest Rates, “There Are Two, Opposite Causal Chains at Work.”
Editor’s Note: Interest rates and inflation are certainly connected to efforts on the parts of central banks to loosen and tighten the money supply. These relationships, however, are much more complex than many people suppose. As we’ve seen in recent weeks, with constant talk about what the Fed will do next, expectations are an important factor in how markets respond to central bank actions. In his article “Ten Great Economic Myths,” Murray Rothbard addresses some of these issues.
Myth 4: Every time the Fed tightens the money supply, interest rates rise (or fall); every time the Fed expands the money supply, interest rates rise (or fall).
The financial press now knows enough economics to watch weekly money supply figures like hawks; but they inevitably interpret these figures in a chaotic fashion. If the money supply rises, this is interpreted as lowering interest rates and inflationary; it is also interpreted, often in the very same article, as raising interest rates. A
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