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What is Inflation?

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What is inflation? In order to have a sensible discussion of it, you first need to define it.

In classical economics, inflation has two general definitions: 1) an increase in the money supply, or 2) an increase in the money supply that is greater than the increase in the production of goods or services. Almost always, when you have a greater amount of money chasing goods and services, the costs for raw materials, labor, overhead and capital costs increase, which results in higher consumer prices. Rising prices are the outcome of the effects of inflation and are not itself inflation.

Rising prices, if you look at it from the opposite direction, reflects a decline in the purchasing power of the monetary unit.

Because of the close association of inflation of the money supply and rising prices, today a high percentage of people consider the rising prices themselves to be what they mean by inflation. Even definitions of the word ‘inflation” will list this characteristic.

In my writings, I want to avoid confusion. Therefore, I try to avoid using the term “inflation” in a vacuum. Instead, I refer either to “inflation of the money supply” or to “rising prices.”

Coins were created to facilitate commerce through the use of standardized monetary units. Initially, the values were solely dependent on the value of the metal in the coins.

Unfortunately, inflation of the money supply has been around almost since the first coins were struck over 2,600 years ago. Just to give you an example, here is how ancient Rome experienced inflation of the money supply (depreciation of the currency) over time, as exemplified by the silver denarius and its successor, antoninianus (declared by law equal to two of the denarius):

211 BC: introduction of the denarius – 4.55 grams of 95-98 percent pure silver

44 BC: Julius Caesar – 3.9 grams of 95-98 percent pure silver

64 AD: Nero – 3.41 grams of 93.5 percent pure silver

148 AD: Antoninus Pius – 3.41 grams of 83.5 percent pure silver

235 AD: Severus Alexander – antoninianus (double denarius) – 3.41 grams of 50 percent pure silver

238 AD: Pupienus – antoninianus – 2.6 grams of 2 percent pure silver

274 AD: Aurelian – antoninianus – 3.41 grams of 5 percent pure silver

During the Middle Ages, a common practice was to shave off metal around the edges of coins, called clipping, in order to then put the smaller piece back into circulation. When done at the orders of the ruler, the recovered metal was usually then used to strike more coins to increase the money supply.

Today, with global monetary units no longer tied to fixed weights and purities of precious metals, governments can more easily inflate the money supply through simply striking more base metal coins or printing more currency or, even easier, simply entering bookkeeping entries on a computer.

Over history, inflation of the money supply has been a frequent reason for the collapse of various forms of money. It is even in process here in America, where the purchasing power of the U.S. dollar has fallen more than 98 percent against an ounce of gold since early 1933.

Patrick A. Heller was honored as a 2019 FUN Numismatic Ambassador. He is also the recipient of the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, 2017 Exemplary Service Award, 2012 Harry Forman National Dealer of the Year Award and 2008 Presidential Award. Over the years, he has also been honored by the Numismatic Literary Guild (including in 2021 for Best Investment Newsletter), Professional Numismatists Guild, Industry Council for Tangible Assets and the Michigan State Numismatic Society. He is the communications officer of Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio archives posted at www.1320wils.com).