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Speaking of Inflation

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Discussions about inflation remind me of a drink I bought in a Shanghai bar in 1948. I kept tossing rubber-banded stacks of paper money, Chinese National Currency (CNC), onto the bar. Finally, the bartender shrugged and said, “That’s enough.” I once told that story to Dr. Norbert Einstein, an economist in Seattle and a distant cousin to Albert. Standing about 5‘4“ he looked up at me and said, “Doktor, doktor, I once bought a pack of cigarettes for one trillion Deutsch Marks.” Of his life in Germany, he has said, “I was born on the right side of the tracks but the wrong side of the border.”

Commentators often mention rising costs nowadays paid first by retailers for their products and services, then by consumers. Apparently, they think that that is inflation. No, they’ve got the cart before the horse.

About 25 years ago, Nobel Laureate Milton Friedman hosted a weekly series on TV titled Free to Choose. In one segment he asked, “How can inflation be stopped?” Then, with money printing presses shown churning out paper money, he punched the stop button. “That’s how,” he said with emphasis.

It’s true that market supply and demand are reflected in prices both rising and falling. But that process is self-correcting, except when government enters the picture. Import tariffs on steel, lumber, food, chemicals, minimum-wage laws, and much more (“to protect American jobs”) hike up prices for all of us consumers.

With honest money such as gold and silver having been replaced several decades ago with irredeemable paper money, fiat money inflation has taken the stage with government manipulating the machinery, just as in China, Germany, France, and many other countries throughout history.

Old-time patients might have muttered on leaving my office, “Wow! Now he’s charging $35 for an office call. I remember when he charged only $5!” “No, no,” I could reply. “It takes seven times more dollars to buy the same thing. I’m the one made visible by what appears to be a price rise.”

For an excellent discussion of what inflation really is and the critical role that government plays in producing it, I’d recommend for everyone’s reading “Inflation in One Page” and Economics in One Lesson, (especially its chapter “The Mirage of Inflation”), both by Henry Hazlitt, famous old-time economist. As Hazlitt points out in “Inflation in One Page,”

Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices. Therefore inflation — if we misuse the term to mean the rising prices themselves — is caused solely by printing more money. For this the government’s monetary policies are entirely responsible.

The most frequent reason for printing more money is the existence of an unbalanced budget. Unbalanced budgets are caused by extravagant expenditures which the government is unwilling or unable to pay for by raising corresponding tax revenues.

This article originally appeared in the January 2006 edition of Freedom Daily. Subscribe to the print or email version of Freedom Daily.

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    Stu Pritchard is an author for The Future of Freedom Foundation. We'll have a more detailed bio for them soon.