We read about inflation not being a problem in today’s world, meaning that prices are not yet high enough to stir revolt among voters. The word “inflation” is almost always taken to mean price inflation, at least since the end of World War II. According to this view, inflation is well-contained if prices are relatively stable and low. Monetary inflation, or increases in the money supply, is generally ignored unless price inflation becomes an issue. Yet we know that productivity and technological advancements can put downward pressure on prices, thereby masking the effects of money supply increases. We also know that banks can go into protective mode and leave massive amounts of central bank money on their books rather than lending it out under the fractional reserve multiplier. In such cases, low price inflation could mean a ticking time bomb rather than a measure of central bank brilliance.
It wasn’t always easy to jack up the supply of money but the printing press and computers have changed that. It thus became important for economists to distinguish between sound and unsound money, and the effects each had on the lives of the people who used them. One touchstone of sound money was its resistance to being increased at will. Another was its voluntary acceptance by the great majority of people who offer goods and services in trade. Clearly, then, the federal reserve note and other fiat currencies are anything but sound. About the only force keeping production in check is their price in terms of other currencies. Given that all governments are addicted to the printing press, this is hardly reassuring.
It’s the height of irony that most people are obsessed with getting more money, yet almost none of them are concerned about its quality, how it is produced, and who produces it. As long as it buys stuff, why should they care? There’s a reason why they should care. As Lew Rockwell has written, “How important is sound money? The whole of civilization depends on it.”
With this in mind I’ve put together a little quiz to focus the reader’s attention on inflation.
Given the sentence stem “Inflation is,” apply it to the statements that follow and decide if the completed sentence is correct or incorrect.
Inflation is . . .
1. A policy of money production that, when controlled by a central bank such as the Fed, assures a stable economy.
3. A policy we can blame mostly on Democrats and their welfare recipients
4. A policy we can blame mostly on Republicans and their welfare recipients
5. A policy we can blame exclusively on the monopoly money producers, which in the U.S. is the Fed and the commercial banks.
6. Nothing to worry about as long as Ron Paul is out of office
7. An indispensable means of financing wars surreptitiously.
9. Nothing to worry about as long as we have real smart guys on the Federal Reserve Board formulating policy
12. Contrary to popular belief, a phenomenon that arose frequently in the 19th century because the U.S. was on a free market gold coin standard
13. A phenomenon held in check by the constraints of production and redemption, as well as the market forces of supply and demand, under a free market gold coin standard
14. A policy for sustainable economic growth, as long as it doesn’t get out of hand, i.e., is equivalent to the rate of growth of real GDP
17. Usually defined as a rise in price of a basket of goods and services with the coincidental result that blame rests on those who raise prices
18. “what happens when people increase the money supply by fraud, imposition, and breach of contract.”
20. The Federal Reserve policy that set the stage for the 1929 Crash and the depression that followed
21. The massive asset purchase policy Ben Bernanke pursued vigorously to save the 10 biggest U.S. banks, which hold 77% of the assets of the banking industry. (paywall)
22. A policy government pursued in the Great Depression, which lasted over a decade
23. A policy government did not pursue in the 1920-21 Depression, which was over in less than two years.
24. A policy the Fed should have pursued in the wake of drastically falling prices of the early 1930s
25. A nostrum the Fed did pursue in unprecedented fashion in a futile attempt to counteract the falling prices of the early 1930s
26. Best controlled by government’s monopolistic control of money and the money supply, since democratic governments invariably act for the welfare of its citizens
27. Best controlled by the voluntary exchange system of the free market, since individuals tend to look after their own welfare
30. “An extension of the nominal quantity of any medium of exchange beyond the quantity that would have been produced on the free market.” [p. 85]