The True Cause of Inflation...

...the Measure of the Inflation Rate

By Robert Ringer

Almost immediately after going off the gold standard, the U.S. government "devalued" the country's currency by about 40 percent causing the inflation rate to surge. It is significant to point this out, because a devaluation is an admission of bankruptcy. What the government was telling foreign countries (who, unlike American citizens, still had the right to redeem dollars for gold) was that each receipt they held was now worth only 60 percent of the amount of gold it originally had promised.

A devaluation, however, is always couched in terms designed to make people believe that the government has performed some sort of fiscal miracle. What, in fact, it has done is announced that it is reneging on its debts.

But nations are far more powerful than individuals, and they do not take kindly to the news that the pieces of paper they are holding are counterfeit. As a result, countries holding large quantities of U.S. dollars began to cash them in — creating a sort of international "run" on the central bank.

Out of desperation, Richard Nixon, on August 15, 1971, threw in the towel and, in effect, admitted to nearly two hundred years of fraud by shutting the gold window to foreign governments. For all intents and purposes, the game was over. From that point on, no one — not even foreign governments — could redeem U.S. currency for gold. The U.S. had become a 100 percent paper money country.

To rub salt in the wounds of American citizens, the government now sells our gold from time to time on the open market. It's come a long way since entering the game as just another competitor — forcing everyone else out of the business, stealing billions of dollars in gold through outright fraud, then, finally, turning around and selling that same gold to the people from whom it was stolen.

The legendary investment advisor Harry D. Schultz summed it up this way: "[The sale of Treasury gold is] a crime against the people of the U.S. [It is] illegal, immoral, and unconstitutional. The U.S. will grow weaker as the backing for its currency is sent overseas and other countries will grow stronger." Remarkably, Schultz made these statements more than thirty years ago! It's no wonder he is listed in the "Guinness World Records" as the world's highest-paid investment advisor.

The government's fantastic gold theft is, unfortunately, only a small part of the overall inflation swindle. Everyone wants the president to fight the inflation rate, everyone agrees it is a big problem, and everyone supports government officials who stride forward on their white chargers vowing to "fight" it.

There is only one problem with all this: The vast majority of people who pledge their support to inflation rate fighting politicians and decry its ravaging effects have absolutely no idea what inflation is, let alone what causes it. Almost without exception, the politician who gains public support for his "inflation rate fighting" measures proposes actions that will make the inflation rate worse.

If I were asked to name one thing that I would want readers to understand and remember from this series of articles, it would be the following:

Increased wages and prices do not cause inflation. In fact, they do not even contribute to it. Inflation is caused by only one thing: an increase in the supply of money. It is this increase in the money supply that causes wages and prices to increase. Wage and price increases, in other words, are a result of inflation.

(Note: In a truly free market, prices may also rise when demand exceeds supply, but such rises are natural and do not involve fraud. Market prices will always adjust to the ratio of supply and demand - which is a good thing.)

What this means is that virtually everything politicians, a majority of economists, and most members of the media tell Americans about inflation is not only false, but the exact opposite of the truth. Big business does not cause inflation. Big labor does not cause inflation. It is Big Brother who causes the inflation rate to increase — and he is the only cause. He accomplishes it through the printing of paper money, and he is the only one who has the power to increase the money supply.

I guess I should go one step further and correct my own definition of inflation. I said it is caused by an increase in the supply of money. Technically speaking, inflation is an increase in the supply of money. To get even more technical, it is actually an increase in the supply of money substitutes.

Just as government cleverly succeeded in getting people to call gold receipts "dollars," which led to later generations believing that the receipts themselves, rather than the gold they represented, were money, so too did government succeed in getting people to refer to an increase in prices as "inflation." This, in turn, took their attention off real inflation: government's printing of worthless paper money.

When most people talk about the inflation rate, then, they use a misnomer. What they are really referring to are high prices. It also would be technically correct to refer to an increase in prices as "price inflation."

In Part VII of this article, I'll explain how all this relates to the "consumer price index," and how government uses this term to further confuse people.

Previous - Money V - Fooling Everyone but Experts: United States Paper Money

Next - Money VII - Buying Into the Con: The Inflation Rate

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