Whatever Happened to Penny Candy? by Richard J. Maybury

3.  Inflation

You have to choose (as a voter) between trusting the natural stability of gold and the honesty and intelligence of members of the government. And with due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.  ~ George Bernard Shaw

Supply and Demand: Who will first reach that clump of grass?

The Roman governments debasement of the denarius had bad consequences. So what’s the big deal if they increased the number of coins in circulation?  Well, it has to do with the law of supply and demand that states when the supply of something goes up, the price per unit of that thing goes down, and vice versa. For example, if everyone wanted shoes but there was only one pair of shoes, the price for those shoes would go up dramatically.  Well, the law of supply and demand affects money just as it affects shoes and everything else; if there is little money, the money is very valuable and will buy a great deal but if there is an abundance of money, it is not so valuable and will buy very little. Which is what happened to the Roman money.  As the politicians counterfeited it, it became almost worthless.  In 100 AD a bushel of wheat cost 3 denarii, in 344 AD it cost 2 million denarii.  Every time the number of denarii rose, each individual denarius lost some of its value. This is inflation: an increase in the supply of money. Inflating causes the value of each unit of money to decrease.  Therefore, one would now need more units of money to buy what one wants. Rising prices is a result (not the cause) of inflation.

Back to the Roman Empire example from above: it was not that the value of goods were going up; the value of the denarius was going down. The same thing is happening today, not just to our dollar but to money all over the world. Governments are creating so much money that its value is dropping.  Thus, prices go up.

Extra money is being created so governments can pay for what they want to buy.  In times of no inflation some prices will go up but in relation, other prices will go down. The danger with inflation is that it causes all prices to rise. Rising prices are just one consequence of inflation but more on that later.

Take away:  Inflation is an increase in the amount of money.  It causes the value of the money to fall, thus prices rise.

⇐ Chapter 2: Tanstaafl, Romans and Us    Chapter 4: Dollars, Money, and Legal Tender ⇒