The understanding of the cause and effects of inflation is crucial to understanding its impact
on society throughout history. Inflation was a main cause for empires to fall. By lowering the
metal content of the coin or nowadays with the issuance of an ever increasing amount of
“paper currencies” backed by “nothing”, a debasement of the currency was and is a direct
consequence. With the debasement of the currency, people are deprived of the purchasing
power of the currency. Before we look at the ramifications of inflation, a correct and distinct
definition of the term inflation is required. The word inflation is derived from the Latin
“inflare” and means to increase or to balloon.1 In this context it relates to the increase of
money supply by continuing government issue of currency.
Up until the 1940s the term inflation only referred to an increase in the money supply beyond
the increase in goods and services during a given period of time.2 By this definition, the cause
of inflation is easy to determine; namely the institution issuing the currency. From the 1940s
through to the present day, the prevailing definition of inflation significantly varies from the
historic definition. The standard definition of inflation today adopted by economists and the
mainstream press is that inflation is an increase in prices. This change of the meaning of the
term inflation is by no means harmless since it paved the way towards inflationism. As we
will see later on in this study, inflation has been prevailing in the industrialized countries
since World War I and has been exacerbated by the complete demonetisation of gold in 1971
as President Nixon closed the “Gold window”.
By focusing on the term inflation I will rely on the historic and the Austrian economic
definition due to its longer period in use and its higher accuracy. The modern definition of
inflation as simply rising prices looks more at the symptoms of monetary inflation and not at
the cause. An understanding of the real cause of inflation is vital to an understanding of
fixing it once it reappears.
Table of Contents
1. Historic and modern definition
2. The effects of monetary inflation
2.1 Consumer price inflation
2.2 Asset inflation
3. Impact on society
3.1 The winners of inflation
3.2 The losers of inflation
4. Is inflation a natural phenomenon or a policy tool?
5. Future outlook for price inflation
6. Bibliography
Research Objectives and Core Topics
This seminar paper investigates the definitions, origins, and societal implications of monetary inflation. The primary objective is to differentiate between historical and modern perspectives on inflation while analyzing how monetary expansion influences wealth distribution, asset prices, and economic stability.
- Evolution of the definition of inflation from a monetary to a price-based concept
- Distinction between consumer price inflation and asset inflation
- Identification of winners and losers within an inflationary economic system
- The relationship between government policy, debt, and currency devaluation
- Evaluation of central bank strategies in response to economic crises
Excerpt from the Book
3.1 The winners of inflation
As written before, a society as a whole always loses when excess currency is issued and is brought into circulation. Nevertheless some groups benefit.
First and foremost, there are the inflators. On the one hand, there are central banks and commercial banks. Central banks concede credits to the commercial banks. In the U.S., the central bank is a private and not a federal institution. It charges interest on money created out of “thin air” and as a consequence increases the money supply.
The commercial banks which are the predominant inflators create money via the fractional reserve banking system. Banks are only required to keep on hand a fraction of the funds deposited with them and can lend the rest out. Let us assume that the reserve requirement is 10% on the deposit. A depositor brings in 1000€. The bank can then create a loan of 900€. The receiver of the credit will buy for instance a washing machine, and the shopkeeper who sells the washing machine will bring the 900 € to the bank again. No matter if it is the same bank or a different one. Consequently the bank can create a new credit and the process goes on. Ultimately, with the money-multiplier-effect 1.000 € can enlarge the money supply to 10.000 €. In normal economic times, commercial banks are always eager to indulge in credit expansion therefore being able to enlarge the money supply and reaping interest payments. A consequence of credit expansion is the artificial lowering of the money rate of interest below the natural rate which triggers a period of economic boom. The boom ends when banks restrict lending as we can see currently around the globe and give rise to a recession or a depression.
Summary of Chapters
1. Historic and modern definition: Analyzes the semantic shift of "inflation" from an increase in money supply to a rise in general price levels.
2. The effects of monetary inflation: Examines how excess money supply manifests through consumer price increases and the inflation of asset values.
3. Impact on society: Details the uneven distribution of purchasing power, identifying banks, governments, and asset holders as beneficiaries, while fixed-income earners and savers suffer losses.
4. Is inflation a natural phenomenon or a policy tool?: Discusses the historical context of the gold standard versus the modern era of fiat currency and government-driven monetary policy.
5. Future outlook for price inflation: Addresses current economic challenges, quantitative easing, and the difficulties central banks face in absorbing excess liquidity.
Keywords
Inflation, Monetary Policy, Purchasing Power, Money Supply, Consumer Price Index, Asset Inflation, Fractional Reserve Banking, Gold Standard, Fiat Currency, Debt, Central Bank, Quantitative Easing, Wealth Effect, Wage-Price Spiral, Economic Crisis.
Frequently Asked Questions
What is the core subject of this paper?
The paper explores the mechanics and consequences of monetary inflation, specifically focusing on its impact on society and the economy.
What are the central themes discussed?
The central themes include the definition of inflation, the distinction between monetary and price inflation, the uneven impact on different social groups, and the role of central banks.
What is the primary research question?
The research explores whether inflation is a natural economic outcome or a result of specific government policy, and who ultimately gains or loses from these dynamics.
What scientific perspective is applied?
The author primarily utilizes the definitions and theoretical framework provided by the Austrian School of Economics.
What does the main body cover?
The main body covers the mechanics of money creation (fractional reserve banking), the historical transition from gold-backed currencies to fiat systems, and the current challenges of global economic stimulus.
Which keywords define this work?
Key terms include inflation, purchasing power, monetary expansion, fiat currency, and quantitative easing.
How does the paper differentiate between "winners" and "losers" of inflation?
Winners are defined as those who access new money first (inflators, debtors, asset holders), while losers are those who face rising prices before their income adjusts (fixed-income earners, savers).
What does the author state about the current "quantitative easing" strategy?
The author argues that quantitative easing is highly inflationary because it relies on the central bank creating money "out of thin air" rather than generating value through economic production.
- Citar trabajo
- Christian Siegl (Autor), 2009, Inflation - Its Societal and Economic Implications, Múnich, GRIN Verlag, https://www.grin.com/document/133740
