Why Inflation is Theft

Money is not wealth. Wealth is what you can get with the money you have. What causes the price of goods and services to rise, or in other words, money to loose value? Any number of things can be responsible for this;

  1. A decrease in supply of goods or services while demand remains constant,
  2. a rise in demand while the supply of goods and services remains constant or
  3. an increase in the money supply (inflation) while demand and the supply of goods and services remain constant.

The first two are just part of a functioning economy. The third, inflation, can actually be quite harmful to an economy. Austrian economists have stated that once a commodity becomes money, any increase in it’s supply serves no benefit to society. In other words, the optimal state of the market is reached when the money supply is held as close to constant as possible. There is always some fluctuation in the circulating money supply due to the fact that money is fluid. As holders of money prefer to save rather than spend the money in circulation will decrease. It will increase when that money is spent sometime in the future. But this fluctuation in the amount of money in circulation is natural and healthy. It provides a very important indicator of peoples preference to save or spend. This preference is what dictates the rate of interest in a truly free market.

When people talk about inflation, they often say that it steals wealth from the poor and middle class and passes it up to wealthier portions of society. What do they mean, it steals, wealth?

Well, the statement is based on a simple economic principle. Every additional unit of new money, money that did not exist prior, that is injected into a market, decreases the value of all existing units of money assuming supply and demand remain constant. This simple economic principle is due to the nature of man. When someone acts to acquire an item it is because they perceive doing so will take them from where they are to where they want to be. If they acquire more an more, the perception is that the effort required to acquire those additional units is more valuable than the units they stand to gain. The subsequent units are valued less than the first. So eventually they will choose to focus their effort toward a different end. This is true of everything, including money. The more money one acquires, the more willing the holder becomes to part with it for other things the market has to offer. In other words his demand increases. This will be true until the individuals cash holdings dwindle down to a point where the holder values his stash of cash more than any good or service.

So the more money we accumulate the more willing we are to trade away portions of our stockpile for things we’d rather have than a pile of money. If we all got a million dollar check tomorrow, we’d soon realize that the value of that million dollars is directly related to the real wealth we can acquire with it. The things available via the labor of others, will have not changed over night so the increase in money can only increase our wealth to the extent that goods are available to purchase with it. Since we now have more money today than we did yesterday, we will be willing to pay far more for a certain good or service than we would have the previous day. This is due to the simple fact that we value each unit of money less than we did when we had fewer.

Ok, you get how individual preference accounts for the value of money and how increasing the supply of money can alter preference. But how does that amount to stealing?

The theft occurs because not everyone receives the new money equally. The individuals who are the first to get their hands on the new money are generally the people who have close ties or connections with the people that produce the money. Since only a small portion of society sees they’re money holdings increase, they find themselves in a unique situation. Everything on the market is priced based on the old supply of money. Prices have not yet been affected by the increased demand that the new money has created. So by inflating the money supply the people who get to spend the new money first, are able to acquire more real wealth. As this happens over and over, the same wealthy few, find themselves able to acquire more and more.

On the flip side, the people who never see any of that new money, are worse off than they were before because the prices of goods and services, especially in those sectors of the economy where the new money was most concentrated, will rise. Their money will now be worth less. When your money is devalued and you can acquire less real wealth, you have been robbed.

I hope that if you’re with me this far, you’re beginning to see just how damaging the inflationary policies of the Federal Reserve can be. Perhaps you’ve noticed the prices of things have risen over the years. Perhaps you’ve heard Grandma or Grandpa exclaim how they could get this or that for a nickel when they were young. Now you have some insight in to why this has occurred. Since the founding of the Federal Reserve in 1913, the amount of goods and services that a dollar can buy has decreased over 90%.

Think of it this way. If you were alive in 1913 and you saved 1 ounce of silver and 1 federal reserve note worth an ounce of silver to spend today, you’d quickly realize that your federal reserve note would only get you about 5-10% of what it would have then. You’d probably cry out, who stole all my wealth! Guess what, your ounce of silver will purchase just about the same amount of goods and services it did in 1913. That is simply because silver is scarce and coining is expensive, so the amount of silver coins on the market has risen dramatically slower than the amount of paper dollars has. It’s outright insanity that we’ve allowed our Congress to establish a small cartel of bankers who have unfettered control over the money supply.

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