Jim Hlavac
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Economic Theory
| Economic Theory |
Inflation is only caused by the printing of money by the government
out of all proportion to the value of goods and labor in a country. A
natural increase in the amount of money must take place, coupled
with the growth of the population and the growth of economic
activity. The faster economic growth occurs the faster the supply of
money must be increased.
If money was in private hands there could be no inflation because
no one could make money out of thin air -- as modern governments
can.
Inflation not a new phenomenon, but it is a much bigger scourge
since the advent of paper money. When money of the realm was gold
and silver there was no way for the king to increase the supply over
and beyond the natural rate. That natural rate increased as new
supplies were brought out of the mines, and as a country sold more
goods than it bought from other countries.
But a prime example of inflation in the past is the influx of gold
and silver into Spain in the 1500's --- after they started mining in the
New World. They believed that gold was real wealth and so they
brought over as much as they could. They, like, Marx, believed the
value was in the thing. What was soon apparent, at least to us though
not to them, was that the increase of physical gold made it less
valuable in the eyes of everyone. The value of gold declined. With a
lower value per piece of gold people wanted more of it to
compensate for the lower value. Hence there was inflation.
The same with paper money. If you have a $1000 in a current
economy, to all of a sudden inject another $1000 nearly overnight is
to mean that everyone has more money, thus they value it less. The
more of a thing the less valuable it is. And the value of each
individual piece of money would fall by half. The amount of wealth
remained the same, but there is a new price on everything because
the amount of money is higher.
Many a government has simply printed bank notes by the millions
in an attempt to survive. All they did was succeed in making the
money worth less in individual pieces of it -- the dollar bill for
instance -- but the amount of wealth in the country remains the same.
Rising prices is not inflation. You can actually have inflation if
prices are falling. And inflation isn't the increase in the amount of
wealth in a nation. Inflation is simply more units of physical currency
available to all people.
out of all proportion to the value of goods and labor in a country. A
natural increase in the amount of money must take place, coupled
with the growth of the population and the growth of economic
activity. The faster economic growth occurs the faster the supply of
money must be increased.
If money was in private hands there could be no inflation because
no one could make money out of thin air -- as modern governments
can.
Inflation not a new phenomenon, but it is a much bigger scourge
since the advent of paper money. When money of the realm was gold
and silver there was no way for the king to increase the supply over
and beyond the natural rate. That natural rate increased as new
supplies were brought out of the mines, and as a country sold more
goods than it bought from other countries.
But a prime example of inflation in the past is the influx of gold
and silver into Spain in the 1500's --- after they started mining in the
New World. They believed that gold was real wealth and so they
brought over as much as they could. They, like, Marx, believed the
value was in the thing. What was soon apparent, at least to us though
not to them, was that the increase of physical gold made it less
valuable in the eyes of everyone. The value of gold declined. With a
lower value per piece of gold people wanted more of it to
compensate for the lower value. Hence there was inflation.
The same with paper money. If you have a $1000 in a current
economy, to all of a sudden inject another $1000 nearly overnight is
to mean that everyone has more money, thus they value it less. The
more of a thing the less valuable it is. And the value of each
individual piece of money would fall by half. The amount of wealth
remained the same, but there is a new price on everything because
the amount of money is higher.
Many a government has simply printed bank notes by the millions
in an attempt to survive. All they did was succeed in making the
money worth less in individual pieces of it -- the dollar bill for
instance -- but the amount of wealth in the country remains the same.
Rising prices is not inflation. You can actually have inflation if
prices are falling. And inflation isn't the increase in the amount of
wealth in a nation. Inflation is simply more units of physical currency
available to all people.