Deflation vs. Inflation and the Legal Tender Laws

There is a common myth that I have heard over and over that deflation would be worse than inflation. FDR and others fought hard to try to stop deflation (AKA promote inflation). Some of my friends have argued that deflation is bad, and some inflation is necessary. I will concede this fact: If we cartelize the banking industry and enforce legal tender laws that allow for fractional reserve banking, then deflation could have immediate negative effects for some. Those negative effects would be felt most by the banks that would go under and people who have taken out large debts. However, if we have a sound currency and do not coerce the public to accept unbacked currency, deflation is a natural occurance of an economy becoming more productive and is not harmful at all. Eliminating the legal tender laws would have a huge impact on our economy. It would first clean out those who benefit most from inflation and then allow us to start an honest economy that would encourage saving again.

Aha! Yes, legal tender laws are flawed. They certainly invest the government with a power and responsibility that is beyond the scope of what is feasible and prudent.

B-Ran wrote:Aha! Yes, legal tender laws are flawed. They certainly invest the government with a power and responsibility that is beyond the scope of what is feasible and prudent.

The market could take care of this one. Even if we just mandated that what we consider "legal tender" was backed by an asset, that would be a huge improvement.