Saturday, September 12, 2009

Inflation Is Always Caused by Bad Government: NOT "Greedy Businessmen"

Remember Zimbabwe where Mugabe printed money like it was going out of style? People were carting around wagon loads of paper bills to pay for some bread (more pictures)? Walter Williams, my favorite economist (alone with Thomas Sowell and Milton Friedman) explains that what causes inflation is an increase in the money supply not backed up by output - remember those printing presses we saw in the News a few months ago on TV? Who gets the blame though by our politicians? - the greedy businessman as he raises prices. Tell that theory to a Zimbabwean.

With the massive increases in federal spending, inflation is one of the risks that awaits us. To protect us from the political demagoguery that will accompany that inflation, let's now decide what is and what is not inflation. One price or several prices rising is not inflation. Increases in money supply are what constitute inflation, and a general rise in prices is the symptom. As the late Nobel Laureate Professor Milton Friedman said, "(I)nflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."

Thinking of inflation as rising prices permits politicians to deceive us and escape culpability. They shift the blame saying that inflation is caused by greedy businessmen, rapacious unions or Arab sheiks. Instead, it is increases in the money supply that cause inflation, and who is in charge of the money supply? It's the government operating through the Federal Reserve Bank and the U.S. Treasury…

Our highest rate of inflation occurred during the Revolutionary War, when the Continental Congress churned out paper Continentals to pay bills. The monthly inflation rate reached a peak of 47 percent in November 1779.

This painful experience with inflation, and collapse of the Continental dollar, is what prompted the delegates to the Constitutional Convention to include the gold and silver clause into the United States Constitution so that the individual states could not issue bills of credit. The U.S. Constitution's Article I, Section 8 permits Congress
: "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures." (Read here at

No more Failed Policies Of The Past that doubled the national debt in 8 years. Obama can do much better than that. He can double it in just 2 years. Yes, He Can. (Read more)

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