An Inquiry about inflation from a ten-year-old drew a response others may find helpful. Mrs. Hoffman is Production Editor of The Freemen.
Thank you for your letter, asking for information about inflation. The members of the staff here at The Foundation for Economic Education have been studying inflation for many years. We have published books and many articles about the subject. I will share with you some of the things I have learned.
Government causes inflation by printing lots of paper dollars. Many people believe that inflation is high prices. But actually inflation is the increase in the quantity of money. How does this increase lead to high prices?
Well, let’s pretend that you’re not happy with the allowance that your parents give you. You don’t have enough money to buy all the bubble-gum, hamburgers, comics or toys that you want. Let’s also suppose that you had a Magic Machine that could print all the dollars you wanted. (This is called “counterfeiting” and people go to jail for doing this. But just pretend that you could print as much money as you’d like.) Since you would have all the dollars from this Magic Machine you could spend as much as you like and would not have to worry about asking your family for a bigger allowance. When you’re on a limited allowance you have to watch your pennies pretty carefully. But if you had a Magic Machine, you could be less careful with your dollars. You wouldn’t have to choose between a new book and a pad of drawing paper. You could buy both and even more! This would be fine and dandy for a time.
But suppose your friends all had these Magic Machines or that you had so many dollars that you gave a lot of them to your friends. Well, if enough of you had loads of money to spend at the local candy store pretty soon something interesting would happen. The candy store owner has only a certain amount of bubblegum to sell. But suddenly, with you and other “rich” kids, there’s a big demand for bubblegum! If he had only 5 packages of gum for sale and there were ten of you who wanted to buy it, any one of you might be willing to pay $10.00 or more for one package of gum. (Remember that back when you had only your allowance, you’d never pay that much for a little pack of gum!) Because of the bigger demand, the owner of the candy store might decide to ask a higher price for the gum—and you will pay it because each of your dollars has lost some of its value. You may seem “rich” but your money has lost a lot of its buying power because there are others who also have lots of money and are “rich.”
In very simple terms, this is what our government has done. Through many decisions made by the officials in the government, there has been an increase in the number of dollars printed. There are just many more dollars—paper dollars that don’t buy as much as the old dollars did. (You’ve probably heard adults say, “Gee, the dollar doesn’t go as far as it used to.”)
The people in this country give the government its “allowance” by paying taxes. But taxes are not popular. So, rather than asking for a bigger “allowance,” that is, for higher taxes, the government tries something else. It prints money with a printing machine. And when the government does it, it’s legal! Because it can legally print almost as many dollars as it wants, the government doesn’t have to go to the people and say, “We need more money to pay soldiers and policemen and to buy all the things we want to give people.” The officials can print more money to pay all their debts. And they can print more money to pay for lots of benefits for their friends. And if they can’t print enough, they can ask for an “advance” on next year’s “allowance.” This way, people don’t have to pay more taxes, the government can hand out goodies and everyone seems happy. But eventually everyone begins to realize that the dollars are not worth what they once were. And, just as with your Magic Money Machine, the government’s money machine doesn’t make everyone rich. Some people seem rich for a while. But when some of the people get some of the newly printed dollars, they bid prices up. Then many other people can’t buy the things they want. And so on.
I’m enclosing some articles you might want to read, particularly one by Mr. Henry Hazlitt, “Inflation in One Page.” In different language, he says the same thing I’ve told you. When you are a bit older, you may also want to read Mr. Hazlitt’s book called Economics in One Lesson.
If you have any questions or would like some more information, please write to me. I will try my best to help.