Sound money is the goal of all citizens and free-market economists which is constantly undermined by the federal government and the Federal Reserve.
As the French economist Frédéric Bastiat said in 1848, “Once false money (under whatever form it may take) is put into circulation, depreciation will ensue, and manifest itself by the universal rise of everything that is capable of being sold.”
Bastiat’s argument against inflation is that increasing money does not increase wealth. In fact, “confusion between money and wealth leads to destruction.”
Public Choice Economic Theory explains the forces pushing the government to spend more money. Voters, special-interest groups, and bureaucrats all want government largesse, and the politicians are happy to oblige in order to gain votes and power.
The problem is that deficit spending crowds out private initiatives. Wiring borrowed money to able-bodied individuals reduces the productive capacity of America and creates inflation, which undermines the finances of working families. Americans may feel wealthier, but it is largely based on borrowed funds.
Today, interest in Bitcoin and other cryptocurrencies serves as a measure of markets’ and individuals’ distrust of the U.S. dollar.
The Austrian economist Ludwig von Mises informs us that money is a means of exchange, not a good in itself. The value of currency is expressed in terms of the number of goods or services that one unit of money can buy. Every American understands it takes more dollars to buy food, gas, and other goods during these inflationary times.
Government spending is presented as the antidote for all economic ills, but Mises informs us that all government interventions fail and lead to more interventions: “All that the government must do not to destroy the monetary order, and all that it can do, is to avoid any such interventions.”
Mises further states, “It is not just an accident that, in our age, inflation has become the accepted method of monetary management. Inflation is the fiscal complement of Statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually leads toward totalitarianism.”
The gold standard of the 19th century produced virtually no inflation. America did not have a Fed and most folks were working and producing. President Calvin Coolidge cut the budget in real money during his tenure. He practiced saying no to rent-seekers and provided low taxes to the producers, as the top tax rate was 25 percent.
Inflation during the presidency of Coolidge was virtually zero between 1924 to 1928 because of lean government and budget surpluses. However, the market crashed in 1929 and President Herbert Hoover raised the top income tax rate to 63 percent. Hoover also signed the Smoot-Hawley Tariff Act, which increased the average tariff rate on dutiable imports to 59 percent, ending the majority of U.S. international trade.
In 1963, the American economists Milton Friedman and Anna Schwartz published A Monetary History, a definitive book on the cause of inflation. Their explanation is simple: inflation is too much money chasing too few goods.
Nixon closed the gold window in 1971. At the time, the national debt was 35 percent of GDP. Now, it’s 122 percent. Also, in 1970, Nixon appointed Arthur Burns as chairman of the Fed. Burns expanded the money supply, which led to very high inflation until Fed chair Paul Volcker raised interest rates to 20 percent and cured inflation.
In the 1980s, economist Allan Meltzer, who reconstructed the Fed’s decision-making during the 1970s in his 2,100-page History of the Federal Reserve, delivered a stark verdict.
It was monetary policy set by the Fed that primarily created the problem, Meltzer argued, explaining: “The Great Inflation resulted from policy choices that placed much more weight on maintaining high or full employment, than on preventing or reducing inflation. For much of the period, this choice reflected both political pressures and popular opinion as expressed in polls.”
Fed chair Ben Bernanke made 2 percent inflation the official Fed policy in 2012. This terrible idea originated in New Zealand in the mid-1990s. The Fed employs 400-plus Ph.D. economists promulgating two percent inflation, and these economists are purported experts. I ask the rhetorical and ethical question, “Why would a self-respecting economist participate in destroying the value of the dollar?”
Thomas Sowell said: “too much of what is called ‘education’ is little more than an expensive isolation from reality.” Modern Monetary Theory, now adopted by the U.S. Congress and president, is the antithesis of sound money. Governments adopt fallacious (I might add ridiculous) theories because it suits their purposes. For example, the Fed has a target of 2 percent inflation, injuring the working class. Recently, I talked to a Fed economist, and he indicated the Fed was going to let inflation run hot, which is an apt description for 7 percent inflation.
Inflation is a serious problem undermining free markets by making accurate business forecasts impossible while robbing average Americans.
Here’s an example from 2000 to 2020: my company CaptiveAire increased prices an average of 1 percent per year, but in 2021, we raised prices 20 percent because stainless and galvanized steel doubled in price, along with most components.
The result is calculations are difficult, or impossible, with rapidly rising inflation caused by excessively high demand, caused by governments wiring money to folks staying at home. And that results in instant price increases.
Government officials fail to realize that goods must be produced — or stated another way, demand does not produce supply. We currently have zero interest rates and massive federal deficits, financed by the Fed.
Inflation is not transitory. It is permanent until the following two actions are taken: the Federal Reserve must allow interest rates to be set by the market and the federal government must balance the budget without raising taxes.