Inflation¶

Inflation is the sustained decrease in the purchasing power of money over time, manifesting as a general rise in the price level of goods and services. Inflation is understood not as a natural economic phenomenon but as an inevitable consequence of currency debasement—the expansion of the money supply relative to the available goods and services in an economy.

Mechanism and Causes¶

Inflation results from increasing the quantity of money circulating in an economy without a corresponding increase in real output. When more monetary units chase the same amount of goods, each unit becomes less valuable, and prices rise to reflect this dilution. This is the direct effect of debasement, whether accomplished through reducing the precious metal content of coins, printing additional paper currency, or expanding credit through the banking system.

Historical examples demonstrate this relationship. When Rome progressively reduced the silver content of the denarius, prices rose in proportion to the debasement. Similarly, when Revolutionary France printed assignats in ever-increasing quantities, prices denominated in assignats rose dramatically, even as prices in gold or silver remained relatively stable.

Historical Evidence¶

Numerous historical episodes demonstrate the connection between monetary expansion and inflation. Medieval monarchs who recalled and reminted their coinages with reduced precious metal content invariably witnessed subsequent price increases. The Spanish price revolution of the 16th century, following the influx of New World silver, represented inflation caused by a dramatic increase in the money supply.

England under Henry VIII experienced significant inflation as the king progressively debased the coinage to finance his military and personal expenditures. Prices rose in rough proportion to the reduction in the silver content of English coins, impoverishing those on fixed incomes while enriching those with debts denominated in the debased currency.

The American Continental dollar provides another clear example. As the Continental Congress printed increasing quantities to finance the Revolutionary War, prices rose dramatically. The phrase "not worth a Continental" reflected the severe inflation that rendered the currency nearly worthless—a 99% loss of purchasing power in just a few years.

Distinction from Hyperinflation¶

While inflation represents a general erosion of purchasing power, hyperinflation refers to extreme, accelerating inflation that destroys a currency's function. Moderate inflation may persist for extended periods while the currency retains some utility, whereas hyperinflation represents the terminal phase of monetary debasement when confidence collapses entirely.

The transition from inflation to hyperinflation often occurs when the public recognizes the debasement pattern and begins to anticipate future monetary expansion. At this point, the velocity of money increases as people rush to exchange currency for real goods, accelerating the loss of purchasing power beyond what the raw increase in money supply would suggest.

Inflation operates as a hidden tax, transferring wealth from savers and creditors to debtors and those who receive the newly created money first. Fixed-income recipients—pensioners, wage earners, bondholders—suffer the most, as their incomes fail to keep pace with rising prices. Meanwhile, those with access to credit or those who receive the new money early (governments, banks, politically connected entities) benefit from spending the money before prices fully adjust.

This wealth transfer creates social tension and erodes the middle class, which typically holds savings in monetary form rather than in inflation-hedging assets. Historically, sustained inflation has contributed to political instability, class conflict, and the breakdown of social trust.

Monetary Theory¶

Inflation is always and everywhere a monetary phenomenon, caused by expanding the money supply faster than the growth of real goods and services.

This perspective implies that controlling inflation requires monetary restraint—limiting the expansion of the money supply. Historically, commodity-backed currencies (gold or silver standards) provided such restraint by tying money creation to the availability of the monetary commodity. Modern fiat systems, having removed this constraint, require institutional mechanisms or policy commitments to prevent excessive debasement and the resulting inflation.

Relationship to Gresham's Law¶

Inflation creates the conditions for Gresham's Law to operate. As one currency inflates (is debased), it becomes the "bad money" that people prefer to spend, while sound money is hoarded. This dynamic accelerates the inflation of the bad money by reducing its velocity initially, then dramatically increasing velocity as people lose confidence. This represents a recurring pattern in monetary history.