General Considerations on Inflation

1. The Origin and Nature of Inflation

So far we have presented the operation of a natural monetary system of competing commodity monies. We have also argued that there is no utilitarian rationale for intervening into the market process and altering the money supplies through political means.

Now we must turn to deal with the vitally important phenomenon of inflation. We can define it as an extension of the nominal quantity of any medium of exchange beyond the quantity that would have been produced on the free market. This definition corresponds by and large to the way inflation had been understood until World War II.^[1] Yet it differs from the way the word “inflation” is used in contemporary economics textbooks and in the financial press. Most present-day writers mean by inflation a lasting increase of the price level or, what is the same thing, a lasting reduction of the purchasing power of money. Let us hasten to point out that, as far as mere vocabulary is concerned, both meanings of the word are perfectly fine, if only they are used consistently. Definitions do not carry any intrinsic merit; but they can be more or less useful for the understanding of reality. Our definition of inflation singles out the phenomenon of an “increase of nominal quantity of any medium of exchange beyond the quantity that would have been produced on the free market” for the simple reason that this phenomenon is causally related to a large number of other phenomena that are relevant from an economic and moral point of view. As we shall see, inflation in our sense is the cause of unnatural income differentials, business cycles, debt explosion, moderate and exponential increases of the price level, and many other phenomena. This is why we hold our definition to be the most useful one for the purposes of the following analysis. The reader will soon be in a position to verify this contention.

Inflation is an extension of the nominal quantity of any medium of exchange beyond the quantity that would have been produced on the free market. Since the expression “free market” is shorthand for the somewhat long-winded “social cooperation conditioned by the respect of private property rights,” the meaning of inflation is that it extends the nominal money supply through a violation of property rights. In this sense, inflation can also be called a forcible way of increasing the money supply, as distinct from the “natural” production of money through mining and minting. This was also the original meaning of the word, which stems from the Latin verb inflare (to blow up).

Why do people inflate the money supply in the first place? As we have seen, each new money unit benefits the first recipients; for example, under a silver standard, the miners and minters of silver. We here encounter a providential incentive for the natural production of money. But we must not ignore that the benefits that accrue to the first recipient also present a constant temptation to forcibly increase the money supply. The history of monetary institutions is very much the history of how people—governments and private citizens alike, but mostly governments—have given in to this temptation. People inflate the money supply because they stand to profit from it.

Economists are usually reluctant to dwell on the moral dimensions of social facts, and rightly so, because moral questions are outside their customary purview. But one does not need to be a moral philosopher to know that certain incomes are illegitimate; that they derive from a violation of the fundamental rule of civil society—respect for private property. And it would be irresponsible, even for an economist, not to point out that such illegitimate incomes can be obtained, and have been obtained very often, through an inflation of the money supply. Clearly, such incomes offend any notions of natural justice and are impossible to square with the precepts of Christianity. Thomas Woods is very much on point when he remarks: “If there is a principle of Catholic morality according to which such insidious wealth redistribution is acceptable, it is not known to the present writer.”^[2]

Let us emphasize that inflation is not problematic because in some larger sense it benefits some people at the expense of others. All human actions entail distributions of benefits. For example, if John and Paul court Anne, and Anne eventually decides to marry John, her decision comes “at the expense” of Paul. Similarly, a mining business gains “at the expense” of other businesses that would have come into existence if the miner had not paid higher wage rates for the workers, who have therefore agreed to work for him rather than for these other businesses. But the benefits accruing to John and to the miner in the foregoing examples do not come through an invasion of the physical borders of other people’s property. Anne was not Paul’s property; John could therefore justly marry her. The workers were not the property of any employer; our miner could therefore justly hire them.

Things are very different in the case of a robber who through his action obtains some part of other people’s property that they would not have consented to give him; thus he invades their property. And in the same sense, intentional misrepresentation can entail an invasion of property. When the counterfeiter manages to sell a false certificate, he too obtains some good or service that he would not have obtained without the fraud.^[3]

2. The Forms of Inflation

Inflation is one of the subjects on which economists have spilled much of their ink. But virtually all of these economic analyses suffer from a much too narrow, materialistic definition of inflation. Neither the price level, nor any money aggregate gives us the key for a proper understanding of inflation. Rather, the most useful approach is to focus on the legal rules of money production. Are the market participants free to use and produce money as they see fit? Or are they prevented from doing this? These are the relevant questions. They lead straight to the moral-institutional definition of inflation that we have espoused above. Inflation is that part of the money supply that comes into being because of the invasion of private property rights.

In the first part of our present work, we have studied the production and use of money under the hypothesis that property rights are respected. Now we turn to analyzing step by step the various ways by which property rights can be violated, and have been violated, in order to artificially increase the money supply to the benefit of the perpetrators or their allies. We will first analyze inflation in a free society and then turn to inflation induced by government fiat. The former is relatively unimportant from a quantitative point of view, but we need to deal with it first for systematic reasons and also because it allows us to talk about a “good side” of inflation.