What You Should Know About Inflation
CMI Gold and Silver
Hazlitts 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 nations 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 governments
monetary and fiscal policies.
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 isnt. 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
nations 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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© 2012 CMI
Gold and Silver