Mises
Henry Hazlitt said that to cure inflation, stop inflating, but surprisingly, most economists and politicians don’t want a cure. They believe a little inflation is not only good, but necessary. According to this view the real boogeyman is deflation—“a general decline in prices,” per Ben Bernanke—and government’s monopoly money-manager is dedicated to doing everything possible to keep prices forever rising.
Not everyone cherishes having their money driven into the abyss of worthlessness by the deliberate actions of others, but given its overwhelming fear of deflation, along with the profit for a connected few in counterfeiting, the Fed goes ahead and ruins our money anyway.
Admittedly, when your job is to print paper mandated as legal tender at almost no cost, in such a manner that the general public is made unaware of the pain yet to come, who likely have no idea even what your job is other than making muddled public pronouncements, things can occasionally get out of hand. In the extreme, this can lead to inflationary disasters such as those that occurred in Germany, Hungary, China, Greece, Israel, Zimbabwe (twice), Yugoslavia, Peru, Argentina, Venezuela, and most recently Lebanon. By 2018, for instance, the annual inflation rate in once-prosperous Venezuela hit one million percent. Zimbabwe, having achieved an estimated annual inflation rate of 89.7 sextillion percent in November 2008, cooled down then re-ignited again to 737 percent by July 2020.
Hidden behind these percentages was pain most Americans can’t imagine. A former Lebanese entrepreneur, who lost everything during his country’s monetary meltdown, reflected on his experience:
Watching ordinary people resort to crime and violence just to feed their children and care for sick relatives is the inevitable conclusion of a currency collapse. People are never prepared for it and the desperation leads to severe consequences.
In the US, Fed chairman Paul Volcker, appointed by President Carter in 1979 to put a brake on inflation that would peak at 11.6 percent the following year, took a cold-blooded approach and simply stopped printing money rather than directly raising interest rates. In response to questions during his Senate confirmation hearing, Volcker told them,
. . .the [money] supply had been “rising at a pretty good clip,” and there was no evidence the nation was “suffering grievously from a shortage of money.”
What happens when someone on a bender stops cold turkey? By late 1980, the pain had arrived, as the federal funds rate hit 20 percent and the mortgage rate 18.45 percent but only for people with good credit.
As the Proverb says, “As a dog returns to its vomit, so fools repeat their folly,” and so the printing presses have been rolling since the Volcker episode. According to the Federal Reserve Bank of St. Louis, in response to pandemic shutdowns in 2020, the Fed switched to industrial grade inflation, boosting M1 from $1.5 trillion in January 2020 to $7.3 trillion by January 2022.
Conflicting Monetary Histories
Alan Greenspan, who followed Volcker as Fed chair in 1987, reflected on the Fed’s performance as a guardian of monetary stability over the decades, telling the Economic Club of New York in 2002 that,
. . .in the two decades following the abandonment of the gold standard in 1933, the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money.
More revealing still was what he said before the passage above:
Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800. (emphasis mine)
You might want to read that last part over. Consider what the period 1800-1929 included: devastating wars, slavery and its termination, the explosive growth of industrialization, railroads, inventions, and population, especially from immigration, and a decrease in agricultural employment due mostly to technology. Thomas Edison alone received a record 1,093 patents. Tesla-Westinghouse AC electrification projects transformed factories and cities and spurred the invention of household appliances such as washing machines, vacuum cleaners, and refrigerators. Cars, radios, and to some extent, airplanes—the science fictions of their day—became accessible to the middle class. Prosperity during this period, especially during the latter part of the 19th century, skyrocketed.
Even under a government-controlled gold standard, prices in 1929 were only 1.36 times higher than they were on average in 1800. Sounds like more of a period of deflation rather than inflation. And we find that prices in 2024 are 18.44 times as high as average prices in 1929. Greenspan was correct—by unleashing the constraint of “domestic gold convertibility,” Fed inflationists have devastated the value of the dollar and redistributed the wealth of dollar users.
Yet Bernanke—scoring a near-perfect SAT score during his high school days in Dillon, South Carolina, earning a PhD in economics from MIT, awarded Time Magazine’s Person of the Year in 2009, and winning the Nobel Memorial Prize in Economic Sciences in 2022 for his work on the Great Depression—mustered this comment about inflation:
Since World War II, inflation—the apparently inexorable rise in the prices of goods and services—has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an “inflation bias” in the policies of central banks, and still others. (emphasis mine)
He suggests that the cause of inflation is subjective, a matter of opinion (“pick your favorite”), but whatever it is, it’s “apparently inexorable.” How did the economy somehow avoid a significant rise in prices during the period Greenspan mentioned—1800-1929? Nothing inexorable there, other than long-term price stability. Then again, unlike today, most of that period was constrained by “gold convertibility.”
If a gold miner introduces his product into the economy it thereby increases the money supply (assuming gold is accepted as money) but is it fair to call that inflation? Gold’s limited quantity is one reason it’s been accepted as money. Nor has the miner violated anyone’s property rights by extracting and exchanging it for goods or services. He’s actually engaged in barter when he trades it for something else. That it happens to be universally-accepted in trade and is called money sometimes obscures this fact.
Paper money that rolls off the presses without a commodity behind it has never been accepted without government fiat. It derives its power from the guns behind it in the form of legal tender laws. Central banks like the Fed are the state’s private counterfeiters.
Since the state still prevents us from using gold, many people—including the Lebanese entrepreneur previously mentioned—are finding monetary security in Bitcoin. Though I personally have reservations about money that only exists in cyberspace, without physical manifestation, it nevertheless has properties that make it suitable for a medium of exchange and preferable to fiat money.
Originally Posted at https://mises.org/
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