Simple Liberty  



Monetary Reform

Chapter 4

Currency Inflation

Written by Darrell Anderson.

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

The physical laws described by physics prohibit perpetual motion. In the desire to forego future labor to satisfy the individual pursuit of happiness, people nonetheless have searched for ways to create perpetual motion. Overproducing and storing wealth is one way of creating future exchange power and sustaining energy flows. Because of the high division of labor in the modern exchange system, storing future exchange power is typically performed through the concept of money, specifically, the accumulation of currency.

When using currency to store future exchange power, that exchange power represents wealth not yet owned. A general circulating currency is a token symbol of the concept of money and represents debt — an unfinished exchange of wealth. Unlike wealth or the token symbol used to represent unclaimed wealth, debt exists in the imaginary world and is not subject to decay. Therefore, accumulating currency becomes an attractive means of storing future exchange power.

When currency is used as exchange power, accumulating currency is the accumulation of debt obligations. Unlike private contractual debts, those IOU obligations associated with a general circulating currency are owed to anybody using the currency. All people using a general circulating currency expect the future use of that currency to be honored in an exchange for wealth, regardless of who the other party might be or when that currency is used. Those token symbols of unclaimed wealth represent future energy flows.

By inherent design, accumulating debt obligations passes to other people a reciprocating requirement for labor and the creation of wealth. Because some necessary forms of wealth cannot be stored long term and wealth is always consumed, new wealth must be created before currency can be exchanged.

All humans are “prisoners” of the physical laws of the universe and accumulating exchange power by storing currency is simply a result of all humans being a part of that natural system. Other than within vacuums, energy is always needed to continue motion. Regarding the creation of future wealth, that energy is provided by human labor and machines that multiply the capacity of that labor.

Surviving long-term from artificially created debt obligations is an effort to create a virtual perpetual motion machine — but accumulating debt obligations is only an expression of low time preferences. Wealth can be exchanged for wealth at any time, but accumulating future exchange power through currency is merely a desire to receive that wealth tomorrow instead of today. In any community of people using currency, wealth is still being exchanged for wealth — currency only introduces a time delay for when energy flows will be consumed.

Enslavement can be physical, but in the modern world that enslavement is subtler and often is provided through the monetary exchange system. One method is to control and manipulate the general circulating currency. By controlling the currency, individuals can increase exchange power by increasing the amount of claims they have on the wealth of the community. That is easy to do simply by creating more currency.

The amount of currency circulating in a community is related to the division of labor.[1] As the division of labor rises, so does the need for currency increase. In a small self-sufficient community, direct trading of wealth for wealth satisfies all exchanges and currency is unnecessary. In a large global exchange system, currency becomes more important because a high division of labor means people are less self-sufficient and indirectly depend upon exchanging wealth to sustain energy flows.

The most commonly known method for increasing exchange power through a general circulating currency is known as counterfeiting. Counterfeiting creates currency that closely resembles the general circulating currency, and except to trained eyes, is difficult to distinguish from the general currency. Simply printing more currency increases exchange power. Because currency is a token symbol of an unfinished exchange of wealth and does not enter into circulation without an initial exchange of wealth, counterfeiting is an effort to get something for nothing.

Counterfeiting creates new currency not related or backed by any previous production and exchange of wealth. This process means there is more currency in circulation than is represented by production and exchanges of wealth. Counterfeiting therefore inflates the general currency. Currency inflation is caused by increasing the quantity of currency in circulation beyond the need for currency.[2]

This inflation is more readily seen when observing the monetary system elements through a relational identity:

Supply ↔ Demand
(Volume of Goods and Services)×(Price) ↔ (Desire)×(Volume of Currency)×(Rate of Circulation)

Identities are not mathematical equations that can be solved, but only provide a way to generally observe processes. This relationship between supply and demand is self-correcting. As one element of the identity changes, the other components adjust, much like water finding its own level. If the volume of currency in circulation increases without a corresponding increase in the volume of goods and services (exchanges of wealth), something has to give — usually overall prices tend to rise.

Currency serves only one purpose — to facilitate the exchange of wealth. Therefore, individuals in a community who use a general circulating currency expect — at a future date when they decide to exchange currency for wealth — that they will receive the same exchange value of wealth that they sold when they received the currency. They expect exchange power to remain stable. People expect to receive a specified amount of wealth. When prices rise, holders of currency receive less wealth than they had expected from the original exchange.

There are two types of inflation, price and currency inflation. Price inflation often is a result of normal market forces and conditions. A widespread frost-freeze in Florida that destroys crops would lead to increased prices in citrus products because demand would exceed supply. However, that expected demand affects only one segment of the entire market of exchanges. All things being equal, prices in other segments of the market would decrease if consumers spend more on higher priced citrus products. Aggregate prices remain stable.

Currency inflation, however, is caused by changes in aggregate demand. Isolated price fluctuations always will exist without currency inflation, but currency inflation always will cause aggregate price increases.

As many economic texts explain, too much currency in circulation means too much demand chasing supply, and will tend to bid up prices of goods and services.[3] Inflating a currency reduces the expected future exchange power of a currency.

Currency inflation need not be caused by purposeful intervention. Low consumer confidence creates high time preferences. High time preferences mean a desire to consume wealth today instead of tomorrow. Therefore, the rate of currency circulation will tend to increase. People will save less and spend more, placing more currency into circulation. Both actions tend bid up prices.

Currency inflation can exist without noticeable price increases, but under that condition, the masking of noticeable price changes is deceiving. Such conditions are classic of what Frédéric Bastiat described as “what is seen and what is not seen.” One such condition is when manufacturing and technology methods improve the efficiency of production. Improved efficiency tends to lower the cost of producing goods and services, thereby tending to result in lower exchange prices. If during such a period the currency is concurrently inflated, consumers might not readily notice differences in prices.

Another example is when consumers collectively choose to save their cash rather than spend while concurrently other people are inflating the currency — as is typical during wars. The former process removes currency from circulation while the latter introduces currency into circulation.

Many individuals believe that currency inflation is purely a result of using a paper currency. Currency inflation occurs during times when the currency is something other than paper. In early colonial America, tobacco was used as currency.[4] All people had to do was grow tobacco and they increased exchange power. This is exactly what happened and the quantity of tobacco in circulation soon outpaced the quantity of other available goods and services to be purchased. Demand exceeded supply and the result was increasing prices of goods and services with respect to tobacco but not other commodities.[5]

Currency inflation also occurred during the several gold and silver rushes of the 19th century. Gold and silver were used as a common medium of exchange. New currency was being introduced into circulation without a corresponding production of wealth. At the end of the 19th century with the development of a new cyanide extraction process, the cost of mining gold dropped considerably and helped to cause an inflation of gold into circulation as currency.

Therefore, currency inflation is possible through normal exchange conditions even with a commodity currency. As long as the amount of the commodity in circulation used as currency remained stable, there was no currency inflation. Increase the amount of the commodity used as currency without a matching increase in other goods and services, and prices tend to rise.

Currency is a token symbol of an unfinished exchange of wealth. Thus, any time currency is introduced into circulation without a genuine exchange of wealth the currency is being inflated and expected future exchange power decreases. This is true regardless of the form or substance of the currency.

No politicians were directly involved in causing those past attacks of commodity currency inflation. However, in today’s modern world currency inflation is caused directly by politicians, specifically, through central banking.

To pay expenses, politicians collect revenues by levying taxes, borrowing, or selling assets. When politicians exercise such options, there is no currency inflation because such methods use only the existing currency already in circulation.

Unfortunately, the modern printing press provides another method for politicians to pay for expenses — printing the currency, just like a counterfeiter does in the basement. The difference is the politicians make no attempt to fool other users. Instead, politicians enact legal tender laws requiring people to accept and use the newly printed currency. Politicians practice the same philosophy as the basement counterfeiter, but do not try to fool anybody with facsimile representations of the circulating currency. They simply control issuance, print more, and everybody is forced to use the currency, regardless of the exchange power consequences. As witnessed by the sophisticated sleight-of-hand they use to introduce currency into circulation through the central banking mechanisms, politicians and the financial elite do try to fool people into thinking that the newly printed currency is backed by wealth.

Currencies today are nationalized, therefore politicians control the amount of currency in circulation. Normally this would be no problem, but human nature creeps into the picture. Humans often want something for nothing, especially when the color of law offers opportunities.

Many politicians throughout history have succumbed to the temptation to pay expenses through currency inflation and have suffered subsequent instability in their economies, including total collapse. Modern politicians have shown themselves unable to avoid these same temptations and therefore suffer the same fate.

The root problem is not any grand conspiracy but human nature. People often want something for nothing — that elusive perpetual motion machine, continually seek ways to sustain energy flows in an effortless manner. People enjoy receiving wealth but hate paying full price. Politicians hate levying new taxes because people hate paying taxes and politicians want to be reelected.

Borrowing currency already in circulation has limits because as the politicians borrow more, less currency remains in the pockets of individuals. Within the aggregate, borrowing existing currency causes no change in the total quantity of currency in circulation. However, currency is redistributed to different locations within the aggregate, thereby changing the amount of currency in circulation within various geographical areas. Individual pockets of prosperity and poverty (inflation and deflation) are created.

Furthermore, there are limits to how much debt private investors want to buy and hold — debt is not wealth but the absence of wealth. IOUs represent future wealth and low time preferences, but there are natural limits to delaying wealth consumption because humans must still survive and sustain energy flows. Nobody lives forever either.

Therefore, politicians use the clever scheme of “borrowing” through the printing press. Central bankers buy debt certificates — mere paper IOUs, thereby introducing new currency into circulation. Unlike private investors who buy debt with the currency in their pockets — that currency being evidence of a previous exchange of wealth — the central bankers buy debt with funds created by fiat and backed by no creation or production of wealth.[6] Inflating a nationalized currency is easy because politicians are not personally responsible for any debt they create.[7]

By fiat the currency issued by the central bank is declared legal tender by the politicians. Although alternate or private currencies are possible and do exist, decades of using only one currency traps a nation of people into psychologically being familiar with only the central bank’s currency. Additionally, alternate currencies are usable only within specific or regional markets and seldom are universally accepted. Such currencies often must be converted into the national currency.

When politicians inflate the currency, that inflation acts as a tax because the inflation initially pays for their personal and promised expenses.[8] The eroded exchange power of the currency is a tax because that exchange power is never recovered.

Whenever inflated currency is introduced into the market, the first users of that currency (politicians and privileged constituents) do not experience the inflationary effects. They receive something for nothing. As the currency continually circulates, only those people down the line eventually feel the inflationary ripples as prices rise because demand exceeds supply. This tax is not physically visible, but everybody is aware of the anguish caused by continually rising prices and loss of exchange power.

This continual fluctuating of the exchange value of the currency causes turmoil because nobody can depend upon the future exchange value of the currency. Instead of individuals storing exchange power through currency (low time preferences), people try to accumulate actual wealth or trade their exchange power for immediate consumption (high time preference). This psychological phenomenon creates a gambling atmosphere as people try to outguess the effects of inflation in order to preserve wealth and exchange power. Currency inflation increases uncertainty and fear about the future. People try to play a game of moving money to make money rather than focusing on producing and exchanging actual wealth. This movement of funds increases the aggregate velocity at which currency circulates, further aggravating the inflation. Especially hit hard are those individuals on fixed or low incomes, or people planning for retirement and expecting to live from savings and investments.

Whether politicians print new currency directly or through the facade of a central banking system is irrelevant to the effects: reduced future exchange power within the aggregate. Politicians get first use of this new currency, but the trickle effects erode the exchange power of all the currency in circulation. Because politicians do not exchange actual wealth for currency but instead merely create their own paper IOUs, politicians receive something for nothing. Because politicians hold the general populace responsible for paying these fictitious IOUs, politicians capture the labor of everybody. The “obligation” of creating wealth to back those token symbols of debt rests with the people using the currency. Fortunately, there is a natural limit to how much currency can be printed: the total collapse of user confidence. Germans proved as much with their 1920s hyperinflation.[9] The cost of printing the currency exceeded actual exchange power so Germans issued stamps to affix to the existing currency. Notice the printing process continued, only in a different form. The American colonial Continental suffered much the same fate.[10] Recent examples include Argentina, Bolivia, Chile, Mexico, Poland, and Russia. Even Americans experienced the tip of the iceberg in the 1970s with double-digit inflation.

Some individuals might wonder about currency deflation — the problem responsible for the Great Depression. Just as inflation is an increase in the amount of currency in circulation with respect to the exchanges of wealth, deflation is a decrease in the amount of currency in circulation. That is, the supply of goods and services exceed demand or the ability to exchange. In a true wealth-for-wealth exchange system, currency deflation never occurs because IOUs are privately issued and those IOUs specify both the amount and kind of wealth to be repaid. Those IOUs never enter into circulation without a previous exchange of wealth.

Those private IOUs could be replaced with a general circulating currency. A general currency changes the exchange system relational rules, however. A general circulating currency specifies an expected future amount of wealth, but does not specify the kind of wealth. A general circulating currency also does not specify the issuer and bearer. Those simple changes open the doors to manipulating large-scale monetary systems.

Unlike a wealth-for-wealth exchange system using private IOUs, in a currency system numerous variables can change the quantity of currency in circulation or the velocity at which the currency circulates. Production improvements might lower prices. Availability of natural resources can affect supply. Overall market desire might change such as new fads. Large-scale global events or natural disasters can “shock” the entire system. Any of these elements can affect the monetary system and user confidence, and because a general currency cannot specify the kind of wealth to be received, any of those elements can affect the future exchange power of a currency.

Currency deflation often is feared more than inflation because of the effects of the Great Depression. However, such a large-scale deflation was a result of a previous large-scale inflation — caused by politicians and bankers manipulating the monetary system for personal and political gains.[11] That currency deflation was not the result of natural processes.

Although a monetary system can be manipulated to create currency deflation and provide some people increased exchange power, politicians are loath to move in that direction because of the tremendous slow-down of the market. Currency only serves the purpose of facilitating exchanges of wealth. When there is less currency in circulation, there are fewer exchanges of wealth. Inflating a currency is much more politically expedient and palatable. Deflating also possesses natural limits. Regardless of how hard politicians try to withdraw currency from circulation, a minimal amount will circulate and maintain exchange power, or people will revert to direct wealth-for-wealth exchanges (barter).

Currency inflation occurs when new currency is introduced into circulation without a corresponding exchange of wealth — as often happens when politicians and counterfeiters use the printing press to create that new currency. Thus, with national currencies, subsequent deflation is a reduction of a previous inflation. Such a currency deflation is merely a correction of the original inflation and helps restore prices to their normal and natural market levels. The original problem was not natural exchange processes, but politicians trying to create virtual perpetual motion through controlling and manipulating the monetary system.

If prices decrease by natural exchange processes, then people are becoming wealthier and more efficient at producing goods and services. Only when prices decrease as a result of artificially manipulated currency deflation do people suffer.

An important element to remember is there always will exist a tension between the natural and normal desire to save and invest.[12] Almost everybody wants to build a nest egg or create a “rainy day” reserve, but conversely almost everybody wants to invest excess production to further improve material progress. If there is too much saving in the aggregate then there is less wealth available for investing. If there is too much excess wealth invested then people are not saving. The former opens the door to deflation, the latter to inflation. Even in a wealth-for-wealth exchange system there is no way to eliminate that tension. There always will be oscillations between aggregate supply and demand.

Unfortunately, currency systems amplify those naturally occurring oscillations. The modern process of instantaneously capitalizing production through bank loans amplifies that process even more.

Exchange systems based upon general circulating currencies are huge and complex systems. Currency inflation and deflation can result through natural processes, but are manipulated easily by politicians in an attempt to create virtual perpetual motion through the captured labor of everybody. Both currency inflation and deflation is theft and theft is trespass.

There is a simple solution available to minimize global currency inflation of national currencies. Merely prohibit politicians from borrowing currency not already in circulation — with no exceptions granted. Then the politicians no longer possess the ability to create fictitious IOUs to create new currency backed by no wealth. A better solution is to prohibit borrowing altogether.

Thomas Jefferson, in a letter written to John Taylor, noticed this solution more than 200 years ago:

I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government; I mean an additional article taking from the Federal Government the power of borrowing. I now deny their power of making paper money or anything else a legal tender.

Additional safety is possible through local currencies, thereby forcing the national currency to compete and maintain exchange power.

Currency inflation is another way people try to create a virtual perpetual motion machine. In the Coinage Act of 1792,[13] there was good reason why the congressional legislators specified a penalty of death for any individual who debased the monetary system.


Terms of Use

Next: Chapter 5 — Compound Interest

Table of Contents



[1] Kinley, Money, p. 5.

[2] Gonczy, Modern Money Mechanics, p. 3.

[3] Gwartney and Stroup, Economics, Private and Public Choice, p. 740.

[4] Walker, Money, p. 32.

[5] Friedman and Friedman, Free to Choose, pp. 250–251.

[6] Gonczy, Modern Money Mechanics, p. 5.

[7] Hoppe, Democracy, p. 27.

[8] Rothbard, What Has Government Done to Our Money?, p. 56.

[9] Barnard, Draining the Swamp, p. 24.

[10] Walker, Money, pp. 326–328.

[11] Rothbard, The Great Depression, in toto.

[12] Heilbroner, The Worldly Philosophers, pp. 257–266.

[13] United States Statutes at Large, Volume 1, Chapter XVI, Section 19 (p. 250).