friedman

Milton and Rose Friedman on Inflation by Nathan Jones

Inflation is a disease, a dangerous and sometimes fatal disease, a disease that if not checked in time can destroy a society.

It remains as true now as it [has been throughout history] that a more rapid increase in the quantity of money than in the quantity of goods and services available for purchase will produce inflation, raising prices in terms of that money.

Today, when the commonly accepted media of exchange have no relation to any commodity, the quantity of money is determined in every major country by government. Government and the government alone is responsible for any rapid increase in the quantity of money. That very fact has been the major source of confusion about the cause and the cure of inflation.

No government is willing to accept responsibility for producing inflation, even in less virulent degree. Government officials always find some excuse greedy businessmen, grasping trade unions, spendthrift consumers, Arab sheikhs, bad weather, or anything else that seems even remotely plausible. No doubt, businessmen are greedy, trade unions are grasping, consumers are spendthrifts, Arab sheikhs have raised the price of oil, and weather is often bad. All these can produce high prices for individual items; they cannot produce rising prices for goods in general. They can cause temporary ups or downs in the rate of inflation. But they cannot produce continuing inflation for one very simple reason: none of the alleged culprits possesses a printing press on which it can turn out those pieces of paper we carry in our pockets; none can legally authorize a bookkeeper to make entries on ledgers that are the equivalent of those pieces of paper.

Excerpted from the chapter titled “How to Cure Inflation” in Free to Choose: A Personal Statement by Milton and Rose Friedman (1980).

File under “government officials always find some excuse”:

Early in the COVID-19 pandemic, inflation in Canada was sparked by global forces, including supply chain disruptions and a spike in global demand for goods. Russia's invasion of Ukraine last year drove inflation even higher, particularly for energy and agricultural commodities. But domestic forces have increasingly contributed to inflationary pressures. The Canadian economy began overheating as the economy fully reopened. People still wanted to buy goods, and demand for services soared as households tried to catch up on the many services they had missed out on through the pandemic. Employers could not find enough workers to keep up, and businesses were quick to pass on increased costs to consumers.

– Tiff Macklem, Governor of the Bank of Canada, in a speech given to the Toronto Region Board of Trade on May 4th, 2023.

The part that Tiff left out:

In response to the economic shock brought about by the COVID-19 pandemic, the Bank of Canada undertook a range of extraordinary policy actions to provide exceptional liquidity to support the economy and ensure a stable and efficient Canadian financial system. These policy actions resulted in a rapid expansion in the size of the Bank’s asset holdings, which resulted in a corresponding increase in liabilities to fund those assets. Much of that liability expansion was in the form of settlement balances. Reflecting that rapid expansion, on March 23, 2020, the Bank made the unprecedented move of allowing settlement balances to grow unconstrained. Settlement balances increased more than 1,500-fold—from $250 million before the pandemic (0.2% of the Bank’s balance sheet) to a high of $403 billion (about 69.8% of the Bank’s balance sheet)—in just under 12 months.

– Parnell Chu, Grahame Johnson, Scott Kinnear, Karen McGuinness and Matthew McNeely in Settlement Balances Deconstructed, a Bank of Canada Staff Discussion Paper, June 9th, 2022.

The pale green area in the chart above (labelled “Payments Canada members’ deposits”) reflects the unprecedented growth in settlement balances, i.e., quantitative easing, which dramatically increased the supply of money (see below for M2 in Canada). Inflation is not an increase in prices. It is an increase in the supply of money beyond an increase in the supply of goods and services. When more dollars are chasing fewer goods, prices rise. As Milton has taught us so well, “Inflation is always and everywhere a monetary phenomenon.”

Repeat after Milton by Nathan Jones

“Inflation is always and everywhere a monetary phenomenon.”

“Inflation is always and everywhere a monetary phenomenon.”

“Inflation is always and everywhere a monetary phenomenon.”

Inflation is a disease. It’s a dangerous disease for a society. It is sometimes a fatal disease for a society. It’s a disease that if allowed to rage unchecked can destroy a society, and we have many such examples.
— Milton Friedman, winner of the 1976 Nobel Memorial Prize in Economic Sciences

And one of these examples is the once beautiful country in which I was born.*

Viruses do not wreck economies. Government overreaction wrecks economies. People do not “lose their jobs” to a pandemic. People’s jobs are stolen from them by governments which enforce scientifically and morally unjustifiable lockdowns. Governments follow this injury by printing enormous sums of money to support the people that they have forced into unemployment. In this one-two punch, governments decrease the production of goods while simultaneously increasing the supply of money chasing those goods. This causes inflation. Inflation is not merely a disease. It is theft on a grand scale. Government reserves to itself the monopoly right to print money, and therefore only government can debase the currency. Debasement does not happen by accident. It is carried out as a willful act by those in power over us. It is morally corrupt. It is evil.

Related reading: The Ethics of Money Production by Jörg Guido Hülsmann.


*In Zimbabwe, inflation rose from an annual rate of 32% in 1998, to an estimated high of 11,200,000% in August 2008 according to the Central Statistical Office. This represented a state of hyperinflation, and the central bank introduced a new 100 trillion dollar note. In January 2009, in an effort to counteract runaway inflation, acting Finance Minister Patrick Chinamasa announced that Zimbabweans would be permitted to use other, more stable currencies to do business, alongside the Zimbabwean dollar. In an effort to combat inflation and foster economic growth the Zimbabwean dollar was suspended indefinitely in April 2009. In 2016, Zimbabwe allowed trade in the United States dollar and various other currencies such as the rand (South Africa), the pula (Botswana), the euro, and the pound sterling (UK).