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Affluent Christian Investor | July 7, 2020

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A Brief History Of The Definition Of Inflation

Washington D.C. – Federal Reserve

A reference by Michael Bryan, of the Federal Reserve Bank of Cleveland, discloses the history of the concept of inflation. A Federal Reserve Bulletin from 1919 defined inflation as “the process of making addition to currencies not based on a commensurate increase in the production of goods.”[1] Inflation is a monetary phenomenon.  If currency and credit are stable, then all things being equal, prices should not increase, as discussed in The Federal Reserve has Failed and Inflation is Destructive, but are likely to fall due to productivity improvements. Additionally, it is expected that incomes will increase at the aggregate level across all levels of income.  When price increases occur under these circumstances, it is the result of inflation driven by an interventive authority – government. Interestingly, Michael Bryan acknowledges in his report how the “value of goods is anchored by the laws of nature.”[2] Due to the Law of Nature is the very reason behind the phenomenon I just described.

The term “inflation” began to emerge in the United States during the decades prior to the Civil War. At that time, it was referenced in literature as a monetary occurrence, specific to paper currency. However, by the end of the 1800s the discrepancy between metal coinage (real money) and paper money (representative money) had become distorted.[3] “At the turn of the century [1800s to 1900s],” notes Bryan, “economists tended to refer to any circulating medium as money, and any change in the circulating medium relative to trade needs as an inflation of money.”[4] This change in perception would contribute to the change and the misunderstanding modern economists, government officials, and business professionals experience regarding the source and creation of wealth. Wealth creation had become a self-serving vehicle rather than to support the doctrine of man behaving in the image of God; that is, creating wealth for God’s purpose – the pursuit of happiness and being obedient to God and His Laws.

This separation would become institutionalized by the utter embrace of Keynesianism by much of business and particularly by American politics. Bryan notes that “separating the price level from the money stock, the Keynesian revolution in economics appears to have separated the word inflation from a condition of money and redefined it as a description of prices.” Bryan concludes, “In this way, inflation became synonymous with any price increase.”[5] As with Keynesianism itself, this view of inflation as a separation of currency and credit manipulation is an incorrect view, and leads to poor and destructive decision-making and policy–which is exactly what we have today in spades.

[1] Michael F. Bryan, October 15, 1997, “On the Origin and Evolution of the Word Inflation,” (Cleveland, OH: Federal Reserve Bank of Cleveland), p. 1.

[2] Michael F. Bryan, October 15, 1997, “On the Origin and Evolution of the Word Inflation,” (Cleveland, OH: Federal Reserve Bank of Cleveland), p. 1.

[3] Michael F. Bryan, October 15, 1997, “On the Origin and Evolution of the Word Inflation,” (Cleveland, OH: Federal Reserve Bank of Cleveland), p. 2.

[4] Michael F. Bryan, October 15, 1997, “On the Origin and Evolution of the Word Inflation,” (Cleveland, OH: Federal Reserve Bank of Cleveland), p. 3.

[5] Michael F. Bryan, October 15, 1997, “On the Origin and Evolution of the Word Inflation,” (Cleveland, OH: Federal Reserve Bank of Cleveland), p. 4.

 

 

Originally published on Townhall Finance.

 

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