Inflationomics

Inflation is a Political Creation

Modern day inflation is a political creation. In short, inflation is the product of governments. Without government involvement in the money business there wouldn't be much inflation.

Inflation is made possible by a combination of three forces:

  1. Legal tender laws;
  2. A government granted money-supply monopoly;
  3. Expansion of the money supply and/or credit.

Legal tender laws force a country's citizens to accept that government's money as payment for all debts public and private. In practice, this means that if you tender (offer) U.S. dollars as payment for the purchase of gasoline at a U.S. gas station and the gas station attendant says, "No, I want gold or silver, not U.S. paper dollars," the customer gets the gas for free. This result is mandated by law. It is not an economic phenomenon! Without this law, people could reject U.S. dollars as payment for their goods/services.

A government-granted money-supply monopoly gives the money manufacturer (in the United States, that's the Federal Reserve Bank) the exclusive right to print money and manipulate credit rates among the banks in that country. Others who create their own money will be prosecuted either for counterfeiting or violation of currency laws. Again, this government-granted money-supply monopoly is a political phenomenon, not an economic one. Without this law, people would be able to use someone else's currency or establish their own competing currency when the government-preferred one becomes untrustworthy. Of course, the monopoly allows the final step: an expansion of the money supply.

More money is printed to stimulate the economy; i.e., to promote growth according to the demands of politicians. This is also politically motivated. If people come to believe that government spending puts more money in their pockets, they will be inclined to vote for the candidate who promises the greatest benefit for the least effort.

Without government stimulation, the economy would grow according to market demands, rather than government priorities. Also, without a fiat currency, money expansion would be much more difficult and prices would be more stable (expanding only at the rate at which the supply of underlying hard assets increases).

All three of these forces, when combined, allow governments to create inflation. To understand why governments are inclined to create inflation, see Why Inflationomics is so Popular.

Robert Jackson Smith

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