Commodity Trade Mantra

Inflation: A Semantic Change Worth Noting

Inflation: A Semantic Change Worth Noting

Inflation: A Semantic Change Worth Noting

We hear on the news all the time, “The Fed is fighting deflation,” or, “Central banks are responsible for maintaining a healthy 2% inflation rate.” But what exactly is the Fed fighting? What exactly is inflation and deflation?

The concepts of inflation and deflation have been completely misconceived by the public and economists alike. Back in grad school I was in the middle of class, and I realized the definition of inflation used by my professor was different than what I had originally learned. In fact, the definition given depended on whom I asked, or which book I read.

One can look up the definitions in any Webster’s dictionary published from 1864 through 2003 and find inflation defined as: “Undue expansion or increase, from over-issue; — said of currency.” This definition is seen in older versions of the American College Dictionary describing inflation as “Undue expansion or increase of the currency of a country, especially by the issuing of paper money not redeemable in specie.”

When reading modern definitions of inflation the focus is on the consequences of inflation rather than it’s true meaning, “a continuing rise in the general price level,” as defined by the post 2003 version of Webster’s dictionary, or “A substantial rise of prices caused by an undue expansion in paper money or bank credit,” which is a more recent definition by the American College Dictionary.

These modern definitions identify the symptoms without diagnosing or acknowledging the condition. This is a subtle but inaccurate change in the terminology. A doctor wouldn’t define a disease by simply listing off the symptoms of the illness but rather the condition itself.

Economist Ludwig Von Mises identified the problem inherent in this change of meaning in his book Human Action:

The semantic revolution, which is one of the characteristic features of our day, has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.”

Put simply by Ludwig von Mises, inflation is an increase in the supply of money, and deflation is a decrease in the supply of money.

It’s necessary for the public to understand the correct definition of inflation so it doesn’t get swept away in the ambiguity of phrases like “fighting inflation” which simply translates into “fighting symptoms” under the modern definition of inflation.

Some even ask, is expanding the money supply really so terrible? Isn’t an increase in the supply of other goods economically productive? Yes, expanding the supply of consumable goods and services is beneficial because an economy enjoys the benefits of consuming those goods at a lower cost of personal wealth i.e. lower prices. In fact, the larger the expansion in an economy’s capacity to supply goods and services, the larger the growth in a nation’s wealth and this expansion of supply confers a social benefit.

Most, individuals would agree the existence of money is beneficial to society, but what is the social benefit of increasing the quantity of money? Money isn’t consumed or used in production. Money’s only purpose is to help facilitate the transfer of goods and services, and it creates a metric of accountability. Economist Murray Rothbard explains this in his book, The Case Against the Fed.

An increase in the supply of money cannot relieve the natural scarcity of consumer or capital goods; all it does is to make the dollar or the franc cheaper, that is, lower its purchasing power in terms of all other goods and services. Once a good has been established as money on the market, then, it exerts its full power as a mechanism of exchange or an instrument of calculation.”

If everyone in the world used exclusively gold as money, and if everyone’s supply of gold doubled simultaneously, ceteris paribus, nothing in the world would change besides price (This example also assumes gold is used only as money and not as a consumable commercial good.) There would be no gain in wealth and the price of every single good and service would double accordingly (similar to a 2:1 stock split).

Why then are there so many advocates for inflation? In reality the process of inflation is different than the hypothetical example given above where everyone’s personal money supply increases equally. In the real world, the process of inflation redistributes wealth and creates net winners at the expense of many losers.

In my next post I’ll write a little more on the process of inflation, and about which market participants benefit from inflation and which participants experience a loss.




Courtesy: Joel Bauman

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  • Thomas Keith

    The Fed “fights deflation” only for the reason that it makes the Federal Government’s debt more difficult to repay. Consequently, inflation is preferred.
    However, from a consumer’s viewpoint, deflation’s symptom – that is, lower prices – is what every consumer wants!
    Take it on the chin again – the government gets inflation to the detriment of the people.

  • Fred762

    I’ll bite. Inflation IS the increase in money supply w/o a concomitant increase in goods and services. Inflation can be studied thus: The US dollar was stable for
    roughly 100 years..from about 1813 to 1913..a value set as about 1/20th ounce of gold per dollar. Things were stable price wise..a good men’s suit could be bought in 1813 or 1913 for a gold $20 gold piece. Soon after 1913 [my grand father told me] of him going to market and “filling the car with enuf food for a MONTH” and paying for it with a gold $20 coin.

    Since 1913, the US ‘dollar” has been inflated so much that it has lost 99.8% of its value(buying power) 1913 the bankers foisted the federal reserve system onto us. Most of the inflation has come SINCE 1964..the last year for silver coins and redeemable paper “silver certificates”used as money. Since 1964, the dollar has lost 93% of its it was still reasonably stable up til the gvt removed the silver coins and certificates, the backing for the money…in 1964.

    BTW the minimum wage in 1964 was $1.25/hr, gas was 25 cents and a new Corvette was $3500 IF you had an hour’s worth of 1964 wages..5 silver go to a coin shoppe and the nice man would give you 17 federal reserve notes for those 5 the minimum wage is less than half of what it was in 1964! LOL on us, huh??

  • mgmtboy

    You may want to add the velocity of currency to your definition. If a country ‘prints’ 10 Trillion dollars and issues it to a bank and they sit on it, the increase in inflation would be nominal. The increase in inflation would be the fear that the bank does something with the currency. Banks are sitting on a lot of currency right now.

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