Inflation is caused by printing more money. The government's monetary policies
are responsible for this. Keynesian spending policies and ideology and
the abolishment of the gold standard have permitted the government to depreciate
The answer is to eradicate state control of the money supply. We need to
divest government of its power to arbitrarily increase or decrease the
money supply. In addition, we must build in pressures toward fiscal responsibility
by the government with respect to the production of balanced budgets and
reduction of debt. The federal government must learn to live within its
means – government deficits must be prevented. The establishment of the
gold standard will stifle the hidden and deceptive tax of inflation. Inflation
could be controlled if government were not able to monetize debt or manipulate
Money is a commodity the value of which stems from its usefulness as a
medium of exchange. The best money is the one developed through the market
system. Since barter has obvious limitations, one commodity (e.g., gold)
arises as easier to trade and more useful as a medium of exchange. Exchange
rates (i.e., prices) are established between this one commodity and each
of the other goods. Historically and pragmatically, a commodity's ability
to function as money has been transferred to money substitutes (e.g., the
dollar). Honest money is fully backed by commodities like gold.
Inflation, a monetary phenomenon, is an increase in money and credit. Its
major consequence is rising prices. Inflation occurs when the economy's
aggregate volume of money expenditures grows at a faster rate than its
total real output grows. Inflation is thus an increase in the supply of
money without a corresponding increase in the supply of goods and services.
Inflation consists of expanding a nation's money supply by adding something
other than real money (e.g., gold). Such fiat money, backed only by government
decree, produces inflation. If the quantity of money is increased, the
purchasing power of the monetary unit declines and the quantity of goods
and services that can be purchased for one unit of this money also decreases.
When government expands the quantity of paper money, the purchasing power
of the monetary unit drops and prices rise. After the new money has been
added to the economy, the total wealth produced is not any greater than
it was previously. With added money now being spent, but with no additional
goods and services to spend it on, prices will rise. In the U.S., it is
only the federal government and government recognized banks that can print
money and/or create new dollar credit.
does the government inflate?
Inflation is a dishonest and deliberate policy and tool of politicians
who do not wish to reduce their spending. The government «
creates » new money in order to cover what it spends in excess
of its income. The existence of an unbalanced budget is a frequent reason
for the government to print more money. When more is spent than is raised
by taxes, the government makes up the difference with fiat money. The basic
cause of inflation is the government's unwillingness to cut its spending
plans or to raise the funds it desires by increasing taxation or by borrowing
from the public.
Politicians want to spend but they do not want to raise taxes. Because
higher taxes are unpopular, inflation commonly becomes the answer to deficit
financing. When the government prints more money, people don't have to
pay additional taxes, but ultimately they realize that dollars are not
worth what they were previously. Monetary debasement is a scheme in which
government force is used to take wealth from people and spend it. When
the government makes new money and spends it, the effect on prices and
the supply of goods and services is no different than when a private counterfeiter
Exorbitant government expenditures are often the result of government efforts
to redistribute income and wealth. Inflation can be connected to the appearance
of the welfare state. Political leaders, confident in their own abilities,
rationality, ability to control nature and society, and to produce continual
progress, use government force to redistribute wealth in their compassionate
efforts to achieve economic equality. Additional dollars, created through
the printing press and credit expansion, enable the government to spend
more and support more « deserving » non-producers
than it could otherwise.
Inflation transfers wealth from creditors to debtors of which the federal
government is the largest. Debtors make payment with currency that is worth
less than when the debt was assumed. Inflation repudiates government debt
at the same time that it depreciates the purchasing power of the debt.
the government inflates
The government has several ways of increasing the money supply. Expansion
of the money stock is carried out by monetizing federal debt, by Federal
Reserve « open market operations, »
and by credit expansion through commercial bank loans to private borrowers.
In America, the Federal Reserve System currently has control of the issuance
of unbacked currency. The government's demonetization of gold established
government-sanctioned paper as the exclusive medium of exchange. The government
blocked holders of paper money from protecting themselves from the ravages
of inflation when it denied American citizens the freedom to select gold
in preference to inflatable fractional reserve money. Essentially, all
the government has to do when it wants to spend more money than has been
collected in taxes is to borrow non-existent money from the Federal Reserve
through the issuance of government securities. This new money is spent
and deposited in banks thereby becoming the fractional reserve for even
more unbacked money. New money creation builds on itself and snowballs.
The only limits to the money supply are arbitrary reserve requirements
on banks (i.e., the reserves in cash that a commercial bank holds against
deposits) and debt limits established by Congress.
The Treasury seldom sells government bonds directly to the Federal Reserve.
Rather, the Federal Reserve purchases bonds on the open market thus giving
the Treasury room to sell its bonds on the market. The result is the same
even though the mechanics make the process a bit less obvious.
When the Federal Reserve buys government securities on the open market
it expands the supply of money and credit. Using a cashier's check, the
Fed pays for the securities with its private holdings. The seller, in turn,
deposits the check in a commercial bank. This increases the bank's reserve
balance of cash thus enabling it to lend out several times the amount of
the deposit. Production of fractional reserve money merely requires a journal
entry crediting a borrower with a sum of money and issuing a deposit receipt
in this amount. Commercial banks thus can increase the quantity of money
by lending several times as much as the amounts deposited by their customers
in their accounts. The use of fractional reserves clearly demonstrates
the fraudulent nature of lending claims to mythical property.
« Inflation is a dishonest and deliberate policy and tool of politicians
who do not wish to reduce their spending. The government "creates" new
money in order to cover what it spends in excess of its income. »
Money should be backed by a 100 percent reserve of what is used to back
it. If the government were unable to monetize its debt or manipulate reserve
requirements, then obstacles to inflation would be in place. Under a 100
percent gold reserve standard or system, there would be little or no inflation
since prices would depend on the existing supply of gold. With the inability
to expand the volume of money and credit at will, the political evil of
inflation would no longer be able to be perpetrated by agents of the U.S.
Treasury and officials of the Federal Reserve System.
Inflation is a type of tax that falls on each citizen in the form of higher
prices for what he purchases. It is analogous to a sales tax on all goods
and services. Inflation levies a tax on all who have money or have money
owed to them. Like taxes, inflation distorts prices, changes production
patterns, transfers wealth from savers to spenders, discourages saving
and investment, and stifles individual initiative.
A particularly evil form of taxation, inflation does not affect people
in proportion to their income or wealth. Its incidence depends on the business
or industry in which one works, the elasticity of demand for different
commodities, the specific forms in which a person holds his assets and
debts, etc. There is no way for the government to create new dollars or
bank credit so that each person will benefit equally and simultaneously.
Inflation starts with government expansion of the money supply that immediately
creates benefits for some persons while producing losses for others. Commonly,
individuals on fixed incomes and owners of bonds, loans, and savings accounts
suffer losses while borrowers and property owners enjoy gains.
Some individuals have the advantage of receiving the newly created currency
and bank credit sooner than others. Such persons are able to buy more than
they could previously or to offer higher prices for goods and services
they desire. People who receive the new money and credit first receive
a temporary benefit at the expense of others who receive the new money
or credit later. Those receiving the new money or credit first have greater
income and thus can purchase many goods and services at prices that existed
at the beginning of the inflation. The first groups spend their money when
prices have gone up least (or not at all) and the last groups consume and
pay when prices have increased the most.
When the first recipients of the new dollar offer higher prices, prices
tend to be raised by the suppliers of the goods and services for which
higher prices had been offered. Shifts in income and wealth are generated
by the increased number of dollars. Those who receive unexpectedly high
prices for their commodities benefit from the inflation. They experience
« windfall » profits at the expense of holders
of monetary assets (i.e., dollars and assets fixed in number of dollars).
The influx of new fiat money permits people who gain access to it early
to buy at yesterday's prices. However, there are others to whom the new
money arrives much later. They are forced to pay higher prices than they
did previously for some or nearly all of the goods and services they desire
to buy. The last recipients of the new money pay higher prices while their
incomes remain constant or do not go up proportionately with prices.
Inflation tends to initially create more employment. It is likely to at
first increase sales and selling prices at a faster rate than it increases
expenses. Nevertheless, this effect is fleeting and occurs only when and
if inflation is unanticipated. When individuals begin to expect inflation,
they will make compensating adjustments and demands thus causing costs
to catch up with selling prices. Wages, interest, and raw materials prices
increase as fast (if not faster) than a product's retail price, profit
margins narrow, and the businessman realizes that his profits have been
At each stage of the sequence of transactions by which the new money works
its way through the economy, the advantage of receiving additional dollars
declines. Those who receive it much later must adapt to a situation in
which the items they want are increasingly more expensive.
produces false market signals
Inflation falsifies economic calculations and accounting profits and leads
businessmen to make errors. Inflation misdirects production so that scarce
resources are dedicated to inappropriate projects. Illusory profits deceive
producers, invite malproduction and malinvestments and make planning a
nightmare. The initial aura of prosperity dissipates as prices go up, wages
lag, and business decisions brought about by false market signals produce
Inflation dampens producers' incentives to save and invest in production
facilities. As a result, less is produced. Furthermore, since there has
been less production, there is less to consume, save, and invest. What's
more, with less saved and invested currently, there will be less produced
in the future for individuals to consume, save, and invest. The increasing
uncertainty of profits discourages new investment to a greater degree than
what the overall increase in profits due to inflation does to encourage
investments. Investment, employment, and production are misdirected by
inflation, and ultimately they are all discouraged by it.
When the government expands the money supply to finance its debts or to
create economic prosperity, the result is higher prices. People have more
dollars but the dollar loses its purchasing power. Inflation reduces the
value of the currency and the amount of that reduction is used by the government
to pay its debts. When monetary authorities inflate and depreciate money,
people are forced to accept it at face value and in full payment. The federal
government, as a huge debtor, benefits greatly from monetary depreciation.
When monetary value declines, lenders suffer losses in purchasing power
while borrowers (like the government) gain a like amount. Creditors are
defrauded when debtors discharge their debts by exchanging inferior money.
When progressive tax rates are unadjusted for inflation, the increase in
the nominal value of wages places individuals in progressively higher tax
brackets thus permitting the government to collect a larger proportion
of income and assets. By denying inflation adjustments, the state can also
exact more taxes from businesses. Higher taxes are paid when depreciation
and other production costs are understated and profits are overstated.
Oftentimes, when the government wants to stimulate the economy, it gets
the Federal Reserve System to reduce interest rates. To do this, it must
create more spendable money. Interest rates are decreased by increasing
the supply of loanable funds. This can be done by getting the central bank
to purchase government securities or by directly monetizing debt (i.e.,
by simply printing more money). When monetary authorities expand the quantity
of money and credit, they cause interest rates to initially fall. Businesses
are lured into expanding by the lower interest rates. As a result land,
labor, and capital are bid up. After a while, lenders will catch on and
want a real return. After the new money has flowed through the economy,
rates will return to normal and mistakes will be evident.
Inflation deters saving and investment and promotes a search for alternatives
to saving during the inflation. Why work hard, save, and invest if the
purchasing power of dollars saved is expected to fall? People attempt to
identify and acquire a real store of value in the form of non-monetary
or hard assets such as precious metals, diamonds, real estate, machinery
and equipment, and rare items such as stamps, antique furniture, art works,
books, coins, firearms, etc. People will save and invest little, if any,
unless they are confident that their property will be safe and that their
savings and money will retain its purchasing power.
Not recognizing the government's own responsibility for inflation, politicians
assign the blame to the private sector and advocate the use of price controls
to fight inflation. They fail to understand that price controls cannot
stop or even slow down inflation. All these controls can do is reduce profit
margins, discourage production, and create shortages. Furthermore, and
most importantly, they do not understand that price controls represent
the antithesis of economic freedom.
Traditionally, the gold standard has been used to tie the value of money
to something more constant and stable than the capricious desires of government
officials. Such an impersonal protection is needed to restrain the actions
of those who hold a legal monopoly on the creation of money. Under the
gold standard, the quantity of the money supply is independent of the policies
of government bureaucrats and politicians. Gold represents value uncontrolled
by government. The gold standard takes decisions regarding the quantity
of money out of the hands of politicians.
Making paper money redeemable in gold keeps the government from arbitrarily
increasing the money supply. Not only does full redeemability of the currency
unit restrict government power, it also supports public confidence in money,
allows market forces to work, and protects citizens from disguised taxation
through monetary inflation.
The gold standard provides a market-based medium of exchange and stable
monetary system through which men can exchange and save the results of
their labor. This monetary stability will force the government to abstain
from monetary depreciation. Not only would the government have to stop
inflating, it would also be forced to balance its budget and eliminate
many welfare programs. Under a gold standard, politicians cannot spend
more unless they raise taxes.
Under the gold standard, all claims to gold (i.e., dollars) are receipts
for gold and are fully convertible into a specific amount of gold. Money
and credit expansion is brought to a sudden halt when government and banks
have to redeem their notes in gold. Redemptions would be a chief obstacle
to government's unlimited money creation and spending.
Under the gold standard, banks and individuals would be able to make loans,
but they would be limited to the amounts savers had accumulated and were
making available for lending purposes. The gold standard's requirement
of fully convertible money would keep more than one claim to the same money
Because of its natural attributes and relative scarcity, gold has long
served as a dependable medium of exchange. The quantity of gold changes
very slowly over time. Consequently, currencies fully backed by gold are
susceptible to only a negligible rate of inflation. There has been a gradual
increase in the store of gold with the annual increase in the world stock
usually amounting to between 1.5 and 3 percent. Over time, the total gold
stockpile held by central banks and individuals has always increased and
has never decreased.
If gold was money, there would be a negligible price level increase when
more gold is mined, refined, and processed and an even slighter decrease
as some gold is removed from the monetary realm to be used in industry,
dentistry, jewelry, etc.
Some are concerned that new annual supplies of gold will be insufficient
to carry on the growing amounts and value of world trade. Gold, a hard
currency, may have a new production rate that may not keep pace with economic
growth. This really presents no problem. The existing quantity of money
is always enough to conduct the existing volume of trade. Some deflation
may be inevitable, but this simply means that overall prices will be lower.