“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
– John Maynard Keynes, The Economic Consequences of the Peace, 1919
Inflation has been accepted by many and even promoted by some as a ‘natural phenomenon’, where it is believed that money naturally loses its value over time and prices rise. However, under any serious school of economic thought, no matter what its view on inflation (positive or negative) this is understood to be nonsense. To understand why, you must understand what ‘inflation’ is. Inflation itself is often misidentified. Inflation in the strict sense is the actual expansion (ie. inflation) of the money supply. All things being equal, when the supply of money increases in relation to total goods/services outstanding, the value of said money decreases. This requires more of the same currency to purchase the same unit of wealth (eg. loaf of bread) as it did before . This pricing effect can be seen in exaggerated form in Zimbabwe, where enormous amounts of paper money were printed, causing the value of the currency to plummet, eventually requiring an arm full of money to purchase every day items as each new increase in denomination (adding zeros to the currency) was not enough to keep up with the rapid decline in the value of the currency.
The process of increasing the money supply destroys savings, among other poverty inducing effects. That is not to say that some do not benefit. However, the beneficiaries of inflation are usually the politically connected.
The following example illustrates how the process of inflation confiscates real wealth.
Suppose you have $100 in your saving account and the market value of wheat is $10 per bushel. The value of your savings account can be translated into real wealth of 10 units of wheat.
Now, suppose the money supply is doubled, but your savings account remains the same. All things being equal, the value of your savings will fall by half. It will require twice as many dollars to acquire the same amount of wealth as before. So, the price of wheat will rise to $20 per unit. This means your savings of $100 can now only purchase 5 units of wheat at the new price.
Where did the other 5 units of wheat go? They were confiscated by $100 of the newly created currency which can now buy them at the new price of $20 per unit. Whoever received some of the newly created money can now buy that other 5 units of wheat you used to be able to purchase.
Notice, the dollar amount in your savings account has not dropped, only the purchasing power. The value of your savings in real terms has been cut in half. Without picking a lock, breaking a window or busting down a door, 5 units of wheat were confiscated from your savings account through the process of inflation.
Typically, the money supply is not increased as rapidly as Zimbabwe, but this wealth confiscation and transfer occurs at any rate of inflation, whether it is 3% or 50%. This is known as the ‘secret’ tax. Many argue it is outright theft.
“Specie [hard money] is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.”
–Thomas Jefferson to John Wayles Eppes, 1813
“Mr. Ellsworth thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By witholding the power from the new Governt. more friends of influence would be gained to it than by almost any thing else. Paper money can in no case be necessary. Give the Government credit, and other resources will offer. The power may do harm, never good.”
– Notes on motion to strike out ‘and emit bills on the credit of the United States’ from Article 1, section 8. Motion passed, Constitutional Convention, Philadelphia, PA August 16, 1787
“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”
– George Washington, Letter to Thomas Jefferson on Aug. 1, 1786
“Paper is poverty,… it is only the ghost of money, and not money itself.”
–Thomas Jefferson to Edward Carrington, 1788
“Paper money is unjust…Unconstitutional [as it] affects Rights of property as much as taking away equal value in land.”
– James Madison, Notes for Speech Opposing Paper Money, 1 Nov. 1786
“That paper money has some advantages is admitted. But that its abuses also are inevitable and, by breaking up the measure of value, makes a lottery of all private property, cannot be denied.
–Thomas Jefferson to Josephus B. Stuart, 1817