What You Should Know About Inflation

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by Paul Carter CMI Gold and Silver

     

During Henry Hazlitt’s tenure as a business columnist for Newsweek, he was frequently asked by his readers for an explanation of the cause of inflation and how they might protect themselves from its continual erosion of their savings. What You Should Know About Inflation is the result of those requests. Although first published in 1960, the book is every bit as readable and valid today as it was then.

In order to begin a discussion of the topic, it is necessary to first define what the term inflation actually means. The correct definition is an increase in a nation’s supply of money and credit. In more recent times it has become informal practice to refer to inflation as a general rise in prices. Hazlitt, however, points out that the two meanings are not equivalent, and the failure to grasp this distinction inevitably leads to confusing cause with effect. Inflation, in its proper definition, is almost always the result of government’s monetary and fiscal policies.

Hazlitt spends a considerable amount of time debunking the popular scapegoats of inflation. Cost push inflation, wage-price spirals, the need to match money supply to productivity increases, etc. all fall under the scrutiny of logic and historical data. Through this reiteration of basic principles the reader ultimately develops and intuitive understanding of what inflation is and what it isn’t. And that often times, what is popularly expressed as the cause of inflation is rather just a consequence of it.

A general rise in prices is the result of an increase in the supply of money and credit. The solution then is to simply stop the expansion of money and credit. As simple as it is to say, it is far more difficult to implement in practice. To do so would require politicians to retract many of the gifts from the government that they used to garner votes in the first place. It is this government profligacy that is one of the main sources of credit expansion.

Most of the nation’s money supply does not exist in the form of physical currency, but rather as bank accounts against which checks can be written. When the government cannot pay its bills through direct taxation alone, the Treasury covers the shortfall by issuing bonds. Bonds sold directly to individuals who pay for them out of savings are not inflationary as they use existing money. However, many of the bonds are sold directly to banks or the Federal Reserve. Banks do not use existing money to fund these purchases, rather they inflate the money supply by creating new credit in an account for the Treasury to draw against.

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