Why Most Voters Accept Inflation

There are a few economists (very few) and a small percentage of voters (very small) worldwide who are convinced that central banks inflate their domestic currencies as a deliberate policy. We skeptics monitor the various money supply statistics and find that there is rarely a period longer than a few months in which any nation’s money supply is either stable or falling. We also monitor various price index statistics and find the same thing, with the exception of Japan. Japan did have a few years — 1995 and 2001—3 — in which its official price level fell for over a year by about one or two percent. On Japan, see the chart on “Inflation.”

In testifying before the Congress, every Chairman of the Federal Reserve System invariably warns against inflation, meaning price inflation. He tells Congress that inflation has not been fully overcome, that it lurks in the background, and that recent successes in the war on inflation — price increases of less than 3% — must regarded only as good progress, not a victory. This song and dance has been going on ever since the end of the Korean War.

If you go to the Inflation Calculator of the Bureau of Labor Statistics and search for what you would pay in dollars today compared with $1,000 spent in any previous year, you will find that inflation has been with us, year by year, with the exception of 1955, for over six decades. A $1,000 purchase in 1914, the first full year of operations by the Federal Reserve System, would cost you more than $20,000 today. That is a depreciation of over 95%. This performance should be evaluated in terms of the officially stated purpose of the FED. A good example of this official policy appears on the website of the Federal Reserve Bank of Richmond.

The Fed’s task is to supply enough reserves to support an adequate amount of money and credit, avoiding the excesses that result in inflation and the shortages that stifle economic growth.

The depreciation of the dollar by 95% is not an indication of success regarding the first criterion. The Great Depression, 1929—40, is not an indication of success regarding the second. Neither are the recurring years of recession ever since 1949.

How is it that a government-appointed organization whose criterion of success is stable prices has failed — except for 1930—40 — in its anti-inflation goal, and was successful only during the worst depression in American history? In other words, how is it that success somehow eludes this organization? More important, how is it that it never comes under attack in Congress for its nine consecutive decades of failure?

I suggest two answers: (1) the Federal Reserve is the source of price inflation, not its dedicated opponent; (2) the voting public prefers price inflation to the alternatives: stable prices or falling prices. In short, the Federal Reserve has faithfully delivered what the voters have wanted.


Imagine an auction. You have arrived early. You have looked over the inventory of the items to be auctioned off. You have spotted some items that interest you. You have made a few notes. You have jotted down limits on what you are willing to pay for each item, so that you will not be caught up in the heat of the bidding competition. In other words, you have treated the auction as a business.

A few minutes before the auction begins, you look around the hall. The other bidders have assembled. It is a large crowd. This will tend to drive prices higher.

You then notice something odd. There are several men in three-piece dark blue suits who have entered the hall. Each of them is carrying a bucket. Each of them approaches a member of the audience. Each of them engages in whispered conversation. The person in the suit hands the other person a document and a pen, who signs the document and hands it back and the pen. The person in the suit hands a bucket to the person. The person then takes his seat, with a bucket in front of him.

The auction begins before everyone is approached by someone carrying a bucket. You notice that the bidding is lively. Prices are higher than usual. You also notice that the people sitting next to a bucket are among the most aggressive bidders. They seem to be about to outbid the people without the buckets.

After each item is sold, anyone with a bucket walks forward, sets the bucket down, reaches into it, grabs a handful of what appears to be currency, counts out pieces of paper, hands the wad to the auctioneer, picks up the item he has just purchased, picks up his bucket with his other hand, and walks back to his seat in the hall.

This goes on all day long. The people with the buckets are buying up most of the prime items. The law of the auction remains intact: “High bid wins.”

You attend three more auctions in the next three weeks. You see the same scenario replayed.

Then, in auction number five, someone with a bucket and a pen approaches you. He whispers his offer. You can borrow cash to participate in the auction. You see what this involves: an increase in debt. You hesitate.

He says: “Have you noticed that prices have begun to rise at the auctions you have attended?” You admit that you have.

He continues: “If you don’t add to your holdings of cash, do you think you will be able to buy any of the items you want?” You admit that you have been forced to drop out of the bidding in the last two auctions.

He comments: “With prices rising as they have, what do you think the items you won’t buy today will be worth in a year?” A lot more, you estimate.

“What about five years from now?” It will be even worse.

“Why not borrow the money on a five-year contract? You can get a good rate.” But you decide not to do it. You were warned by your grandparents about consumer debt.

You lose every bid that day.

You then miss every bid for the next month.

You are becoming frantic. At the next auction, another man with a bucket approaches you. He presents the same arguments. Then he adds this. “You may have noticed that interest rates on longer-term loans have been rising. You can lock in today’s rate for as many years as you want. But if you don’t act now, you may be forced to pay more next time.” You sign.

Today, you bid successfully on several of the items you want. Prices do continue to rise. Interest rates also continue to rise. At the next auctions, you start signing more contracts. You start buying items you would not have been interested in two months ago. In the heat of the bidding, you find that you don’t abide by your pre-auction limits on the prices you are willing to pay. You are accumulating a portfolio of items whose prices keep rising.

Then, one evening, you are watching the evening news. There is a photo of a man wearing a three-piece suit that looks like the suits worn by the men with the buckets. The anchorman reports that the Chairman of the Federal Reserve System testified before Congress that day that the recent rise of prices at the nation’s auctions reveals that the specter of inflation has arisen again.

Congressmen questioned him on rising long-term interest rates. This is hurting the middle class, several Congressmen complained to the Chairman. The Chairman replied that the problem is irrational exuberance. Buyers are being caught up in the emotion of the auctions. It is time for people to understand that no tree grows to the sky forever, that people should save for a rainy day, and that a penny saved is a penny earned.

Then the news switches to the latest antics of a 23-year-old blonde celebrity who has been arrested again.

Later that night, you watch C-Span, which you began doing when you quit using Lunesta. You see the entire 90-minute hearing. You also see something that was not mentioned by the newscaster. A Congressman from Texas asked the man in the suit to explain any connection between rising prices at auctions and reports that men with buckets full of currency have been attending auctions. The man in the suit replied that there was no connection whatsoever. The men with buckets attend auctions only to maintain price stability, while seeing to it that the auctions do not suffer a meltdown due to unpredictable tight monetary conditions.

You drift off to sleep. You wake up at 3 a.m. to find that C-span is covering hearings on native American-owned casinos. You turn off the set and go to bed. You dream about Sioux warriors on horseback attacking men in three-piece dark blue suits. You find yourself cheering for the Indians.


“Buy now, pay later.” There are few slogans that better summarize the dominant philosophy of the modern consumer-driven economy.

The popularity of this appeal is inherent in man. He discounts the future. He values whatever he owns now more than the same item owned in the future but postponed for now. What he wants is a way to buy now and pay later . . . or not pay at all.

The wicked borroweth, and payeth not again: but the righteous sheweth mercy, and giveth (Psalm 37:21).

The more present-oriented he is, the more ready he is to buy now and pay later. He starts looking for a way to buy now without having to forfeit ownership of something worth as much or more as the item offered for sale.

Before the money economy, a man might take possession of a sheep today in exchange for his promise of delivering a sheep to the lender next year, and a second sheep the year after. What he hopes for is the birth of two black sheep, which don’t have a good resale market because of what later became known as the Henry Ford promise: “You can get it in any color you want, so long as it’s black.” White wool can be dyed a different color. Black wool can’t. Its market is smaller. Fewer people bid for black sheep. He will repay his debt with black sheep.

Smart lenders of course wrote into their contracts that the sheep to be delivered had to be the same type as the sheep originally loaned. This made it tough on borrowers.

The modern fractional reserve banking system lets borrowers get back into the black sheep scam. Anyway, they think they can. They think they can get something for nothing.

So, they take loans at 5% per annum so they can buy whatever they want at today’s low prices. They are not concerned about a 4% depreciation of the dollar over the following year. They can use depreciated dollars to pay off lenders.

So, when the men with the buckets come around, they find takers. People sign the contracts.

Why would anyone lend money at 5% when the money returned will be worth 4% less? Answer: Because they have a government license to print the money they loan. Paper and ink are cheap. Better a 5% return with 4% inflation than having your license revoked.

Digits are cheaper than paper and ink.

Economists are mostly Keynesians, monetarists, or supply-siders. All three positions assert that a nation needs a central bank to increase the money supply. All three deny that a gold-coin standard without fractional reserve banking is a legitimate ideal. They assure us that the economy needs fiat money to sustain economic growth. Of course, it does not need too much money. Too much money is bad for the economy. It needs a just-right quantity of fiat money.

These people are promoters of gray sheep economics.

Borrowers get to dream of paying off loans with depreciating money. Lenders (bankers) get to lend more money than they otherwise would have: more fiat money to lend. Private creditors get to believe that the central bank will get inflation under control. Economists get jobs promoting the system.

Who are the big winners? Auctioneers. Sotheby’s began in 1804. Christie’s was founded in 1744.

There is one other big winner in the United States: Crane & Company. Privately held, it reports to no one outside its offices. It alone provides the paper for the U.S. currency. It has ever since 1879. Arizona’s Congressman Jim Kolbe has introduced legislation every year for a decade to open up this market to competing bids. So far, no law. The Treasury has refused to tell Congress if any other companies have been allowed to bid. After all, what does Congress think it is? The voice of the People? Well then, who do the People think they are?


The fellows with the buckets full of money have a sweet deal. But there is a risk: they may not get repaid in an economic downturn. Also, there is the problem of competition: new counterfeiters. So, bankers need just enough money to hand out, but no more. But some bankers cheat. They print too much money. This can lead to too much inflation. Congress might get involved. That would be very bad. Congress might revoke some banks’ license to print money. This is terrifying to bankers.

Bankers therefore need a cartel to keep the members in line.

This is the primary function of every central bank: the cartelization of fractional reserve banking. Everything else is subordinate.

There is a continuing complaint among the FED’s critics that the FED gets rich by creating the money it lends to the government. It then gets paid interest by the government.

This is true. It does get paid. What the critics apparently do not know is that the FED returns two-thirds of this money to the Treasury every year. In 2005, it took in a little over $30 billion and returned $21.5 billion.

The FED is the lender of first choice for the government.

The FED alone returns two-thirds of the interest paid. Basically, the FED pays Congress $20 billion a year to sit there and be quiet, rather like schoolchildren in a tax-funded school. When a Congressman cross-examines a FED chairman, he does so with the same authority that a fourth grader raises his hand and asks Miss Snook a question about long division, and with about the same knowledge of the subject. The only time a FED chairman gets asked serious questions is during a recession, and the questions are some variation of the schoolchild’s “Can I go to the bathroom?” The FED Chairman answers: “Yes, you MAY go to the bathroom.” The Congressman looks relieved.

There is a lot of fuss about who owns the FED. This implies that the key to understanding the FED is to follow the money. It does, indeed, but the critics do not understand that the flow of funds begins with the FED. It does not end with the FED.

Member banks own the FED’s shares. Yes, Congress should be told which banks own the shares of the FED and in what percentage. But that would not prove anything except this: the owners are private banks.

The key to understanding the FED is understanding that its goal is not merely to expand the money supply. It is to control the rate of expansion by controlling the banking system as a whole — not too fast, not too slow, but just right.

The FED is owned by private banks to provide a service to the owners of private banks: cartelization. This keeps bankers from “cheating” other bankers by producing too much money, thereby endangering the entire fractional reserve banking system by exposing it to bankrupting bank runs by depositors.

Think of the FED as OPEC. OPEC wants people to buy and use oil. The FED wants people to borrow and spend money. OPEC wants to control the rate of production of oil by legally independent producers. The FED wants to control the rate of production of fiat money by legally independent producers. OPEC protects the market for its product from secret discounts by its members. So does the FED.


Price inflation persists because (1) the FED creates money to buy assets, spending it into circulation; (2) the public wants a little inflation. There is no politically organized constituency for stable money.

The public gets what it wants: depreciating money for repaying debts. The bankers get what they want: constant income from ever-expanding debt. The Congress gets what it wants: placated voters. The FED gets what it wants: a cartel.

There is a price for all this: the absence of 100% market-created, market-allocated money. Instead, the world gets a money system based on the decisions of competing bureaucrats, who do not own the money their central banks create. Power without ownership; authority without full responsibility: here is a formula for disaster.

June20, 2007

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 19-volume series, An Economic Commentary on the Bible.

Copyright © 2007