Inflation
Doesn't capitalism cause the inflation of prices?
No. Under Capitalism, the prices of particular goods can
"fluctuate" over time, but the general price level of most goods decrease over
time due to capitalism's limitless progress.
What is inflation?
Inflation is the general increase in prices on a nationwide scale -- and can only be caused
by an agency that has the power to act on a national scale. That agency is the government. Inflation is the increase in prices
caused by the government 'inflating' the money supply with fiat dollars.
What causes inflation?
Inflation is the result of state intervention into the free market for money -- specifically
the government 'counterfeiting' of dollars (also fiat dollars) which compete
with your earned dollars for goods and services. As the amount of paper money bidding for
goods increases and the amount of goods supplied stays relatively the same, the prices of
all goods increase. Inflation is like a secret tax that robs you of the value of your money before you have a chance to spend it.
Case Study:
Inflation in Hitler's Germany
A historical example of the effects of inflation is Hitler's Germany, where the
price of the German dollar would decrease to half of what it was worth, before people
could have a chance to spend it.
Let us suppose a loaf of bread cost $10 on Thursday. You contract with a man to do a
week's work for $100, which you will be paid on Friday, so you can buy ten loaves of
bread.
Table
1. Monday |
Price of a Loaf
of Bread |
Salary in terms of dollars
(nominal) |
Salary in
terms of bread
(real) |
$10 |
$100 |
10 loaves
($100/$10=10) |
Unfortunately, the government spent most of the week printing and spending new
bills, so that it doubled the amount of money in circulation, so that when you were paid
your $100 salary on Friday, the price of the loaf of bread had risen to $20. Thus, in
terms of Monday's dollars you were only paid half as much, i.e., you could only buy half
as much bread on Friday with you income as you could have on Monday. This doubling in the
price of bread, was caused by the doubling of the supply of money. Since your salary did
not double in nominal terms as the money supply doubled, you were paid in real terms only
half of what you contracted for. This is illustrated in Table 2 below.
Table
2. Friday |
Price of a Loaf
of Bread |
Salary in
terms of dollars
(nominal) |
Salary in
terms of bread
(real) |
$20 |
$100 |
5 loaves
($100/$20=5) |
Observe that the value of your dollars is not the number of dollars you have
(nominal value), but how much you can buy with them (real value). Thus, a man who earns
$1, but can buy bread for a $1 a loaf, is richer in terms of bread, then a man who earns a
$1000 a day, but has to pay $10,000 for a loaf of bread.
The above is in fact what happened in Hitler's Germany. In an attempt to counteract the
effects of the state's expanding of the money supply, people were paid at the end of the
day, rather then the end of the week. They did this because if they waited until the end
of the week, they would have lost a half or more of their income to inflation -- the legal
counterfeiting of money by the government. |
What is the solution to inflation?
To free our money supply from government mismanagement in the interim is best achieved by
establishing free-banking. One possible option might be a gold standard, since unlike
paper dollars, gold cannot be counterfeited, by private or public agencies. Under a capitalist system, there would be no legal tender laws to force
citizens to use any kind of currency, rather each citizen would have the freedom to use what good, he chooses to use as money -- most
likely this choice would be gold. Quoting Richard Salsman, in his
excellent book Breaking the Banks,
Central banking has failed to improve upon what Nobel economist
Friedrich Hayek called "the spontaneous social order" of
free banking, a failure that can be seen as a special case of the
general failure of central economic planning. More precisely, it is
the difference between private planning based on economic profit and
bureaucratic planning based on political expediency. The money and
banking system is too important to our freedom and our economic
prosperity to be left to political manipulation. The system should
be placed on an objective foundation of free-market principles and
removed from the subjective quicksands of political manipulation. It
should be governed by the rule of law and contract, not by the
arbitrary rule of men. We know this has been the most useful
approach in every other branch of industry. It is time to discover
it in money and banking. Free banking offers an exciting,
innovative, and prudent alternative to the central banking system
that has destroyed sound money and sound banking.
Suggested Reading:
Alan Greenspan's Gold and Economic Freedom in Ayn
Rand's in Capitalism: The Unknown Ideal.
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