Mr. Fike is president of Fike Chemicals, Inc., Nitro,
Many economists believe that high prices are a symptom, not the cause, of inflation, just as fever is a symptom rather than the cause of sickness.
If this is so, what is the cause of inflation? One school of economics believes that there is a relationship between the amount of money and the goods and services available at any one time. Then, if the money supply is increased, there is a resultant, although delayed, price increase. In simple terms, if there are one hundred bushels of corn available and a money supply of $100, the price is $1.00 per bushel. If the government arbitrarily prints another $100 of money and puts it into the market, the price of corn soon adjusts to $2.00 per bushel. To say it another way, the price of goods adjusts (slowly but surely) to use up the amount of money available to buy those goods.
Another illustration may shed light on this rather difficult concept that high prices are the result, rather than the cause, of inflation. Let us say a family is living on a fixed income of $500 per month and their gas bill is $50 per month. Then their bill is doubled to $100 per month. Isn’t this increase a cause of inflation? According to this theory, no. Such an increase undoubtedly causes hardship, but it does not cause inflation. If the income of the family is fixed, they no longer have $450 to spend on items other than gas, but, with the gas price increase, only $400. To the extent that the amount of money they have available for other items has been decreased, their demand for those items has also been decreased. If it ended right here, there would be no resulting inflation.
However, with today’s society and social pressures it does not end there. The man who has had an increase in his gas bill goes to his employer and demands a raise. When he has sufficient clout by virtue of a union organization, the employer gives him the raise and in turn raises his asking prices. This still does not cause inflation. Instead, it just reduces the sales potential for his product as long as the money supply remains constant. It does, however, result in hardship on his customers who can buy less of his product or other products because his price is higher. Because the demand for goods has been reduced, some employers are forced to reduce their hiring and some unemployment results.
The hardship and unemployment results in pressure on the politicians who, in order to get re-elected, think they must do something about the situation. Their normal course of action is to give relief in the form of unemployment payments or make-work projects, both of which cost money. Even this program would not cause inflation if taxes were raised to pay for the program, but increased taxes would cause further hardship just as higher prices already have. Instead of raising taxes, they could borrow the money from private lending sources to finance the give-away programs; but this would reduce the amount of money available to private industry and thereby reduce industry’s ability to provide jobs.
The only other choice to finance the give-away is to crank out additional money from the printing press, and this, then, is the real cause of inflation. When more money enters the market without any real increase of goods and services being available, the money already existing is devalued proportionally (and, as in the original story, the price of corn has gone from $1.00 to $2.00 per bushel).
A recent study has shown that the rate of inflation increases every time the amount of money is increased just as surely as night follows the day.
Government officials continue to talk about controlling inflation, but it is unlikely that they will take the medicine to control the real sickness. It is far more popular to try to control high prices which, like fever, are just a symptom of the disease. To control the disease takes more self-denial than most government officials are willing to use.
