Friday, April 17, 2009

Defining Inflation

The old and, to a large extent, traditional definition of inflation is any increase in the quantity of money other than an increase resulting from a switch of the money commodity, gold, from non-monetary uses to monetary uses. For example, the melting down of gold ornaments to increase the quantity of gold coins is not inflation. This is merely a market transaction. Inflation results from (1) new discoveries or mining of gold, and (2) the artificial creation of additional quantities of legal media of exchange.

In our day, however, this definition has been changed. The popular definition is no longer an increase in the quantity of money. Today inflation is defined as one of the results of such an increase — higher prices. Today almost all news commentators use "inflation" as meaning higher prices. Higher prices, of course, are one, but only one, of the important consequences of an increase in the quantity of money.

The Significance of the Altered Definition

In all older books, those written eighty or more years ago, inflation was always treated as an increase in the quantity of money. Almost everyone knows who increases the quantity of money. However, those who increase the quantity of money do not want the public to know who is responsible for inflation, which everyone admits is bad.

They ask, "Who raises prices?" Why, the businessmen, of course. So, if inflation is defined as higher prices, it becomes easy to say that businessmen are responsible for inflation. Today, they are usually blamed for it.

Of course, businesses raise prices. Every business would like to raise prices every day. Employees would also like to raise their wages and salaries every day. Why don't they do it? Why don't businesses raise their prices every day? You and I know why. They cannot get the higher prices. However, in times of inflation, when there is more money, when the government has created more money, there is more money in the market place bidding for their goods. Then they can ask for, and get, higher prices. The party responsible for inflation is the party that increases the quantity of money. This party is not the businessmen who ask higher prices, nor even the labor unions who ask for higher wages, and get them when there is more money or when laws no longer protect free competition for jobs.

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