"The reality of inflation is that governments steal
money from their citizens with absolutely no intention of repaying that
money." (John Maynard Keynes, The End of
Imagine a counterfeiting printing enough money in his basement to
provide every member in his community with an extra million dollars. Could we
say that every member of that community is wealthier? It would
depend...within the community the differences in wealth would have shrunk.
imagine that Peter the barber had saved $200k and Paul had only $20k before
the counterfeiter began his endeavour. Peter had ten times the wealth of
Peter. After both receive the million from the counterfeiter, they are much
Now that every member of the community is a millionaire, businesses
would naturally begin to charge higher prices for their goods and services.
This is the essence of inflation.
Inflation is not a general rise in prices but an increase in the
supply of money, which in turns sets in motion a general increase in the
prices of goods and services. Inflation deals with volume as in the concepts
of inflating a balloon, or inflating the money supply (volume of money).
"Inflation, as this term was always used everywhere and
especially in this country, means increasing the quantity of money and bank
notes in circulation and the quantity of bank deposits subject to check. But
people today use the term `inflation' to refer to the phenomenon that is an
inevitable consequence of inflation, that is the tendency of all prices and
wage rates to rise. The result of this deplorable confusion is that there is
no term left to signify the cause of this rise in prices and wages. There is
no longer any word available to signify the phenomenon that has been, up to
now, called inflation. . . . As you cannot talk about something that has no
name, you cannot fight it. Those who pretend to fight inflation are in fact
only fighting what is the inevitable consequence of inflation, rising prices.
Their ventures are doomed to failure because they do not attack the root of
the evil. They try to keep prices low while firmly committed to a policy of
increasing the quantity of money that must necessarily make them soar. As
long as this terminological confusion is not entirely wiped out, there cannot
be any question of stopping inflation." (Ludwig von Mises,
Inflation: An Unworkable Fiscal Policy)
The irony of today is that the central bank is commonly viewed as an
inflation fighter when in fact it, along with the fractional reserve banking
system, is the actual source of inflation.
Additionally, the various and unavoidable effects of inflating the
actual money supply, such as rising commodities prices and increasing worker
wages, are seen as the causes of inflation!
This represents a complete reversal of cause-and-effect! An increase of the money supply leads to
an increase in the cost of goods and services, not
the other way around!
Below is a chart showing the credit expansion of the US Money supply
since 1981. Note that on March 23, 2006 the USFed
ceased to release figures on M3 (the broadest measure of money supply) claiming
that it was costing too much to calculate. Strange to hear that coming from
the very institution that has the ability to create money.
- Methods of a Wall
Street Master by Victor Sperandeo.
- Mises.org a website devoted to the Austrian School
of Economics, a school of economic thought founded by Carl Menger (Feb 28, 1840 - Feb 26, 1921) with his work Principles of Economics published in 1871.
Banking, and the Federal Reserve System is a great video that examines the
formation of credit and the Federal Reserve System.
- The Federal Reserve Bank of Chicago used
to publish a pamphlet entitled Modern Money Mechanics, which explains M1, M2, and M3.