The Unseen Hand - Ralph Epperson



  • allows you to carry money in a basket, and your goods in a wallet!
  • allows you to live in a more expensive neighborhood without moving!
  • is the price we pay for all the government benefits we thought were free!

These rather humorless phrases about inflation do not answer the only question worth asking about the subject: What causes it?

Everyone agrees that inflation is a drop in the value of money (any given amount of money buys less). But that understanding doesn't answer the question of what causes it.

The traditional definition of Inflation is as follows: ". . . a rise in the general level of prices." Its causes are three in number:

  1. When consumers, businesses and governments spend too heavily on available goods and services, this high demand can force prices up.
  2. If costs of production rise and producers try to maintain profit levels, prices must increase.
  3. The lack of competition between producers can also contribute to inflation.

It appears by this definition that everything causes inflation! But whatever it is that causes it, there is little one can do to prevent it. One who felt this way was Federal Reserve Chairman Arthur Burns who said the following in 1974: "Inflation cannot be halted this year."

One of the reasons no one can supposedly prevent inflation is because Inflation is part of the Inflation-Deflation cycle. At least this is the opinion of one economist: "Nikolai Dimitriyevich Kondratyev, Soviet economist. . . believes that capitalistic economies naturally follow long term cycles: first a few decades of prosperity, then a few decades of slump."

(Note: An interesting contemporary example that brought Kondratyev's cyclical theory into question occurred recently in Chile, the South American country that voted Marxist Salvador Allende into office in 1970. Under Allende's Communist government inflation reached 652 percent a year, and the Wholesale Price Index rose by a staggering 1,147 percent a year. That meant that wholesale prices were doubling every month. 4 After a coup ousted Allende in 1973, and the Pinochet administration changed the government's direction, inflation dropped to less than 12 percent a year and the Wholesale Price Index actually fell. It is doubtful that Chile's successful reduction in the inflation rate can be attributed to a long-term cycle!)

Another economist believes that America's lifestyle is the major cause of inflation.

"[Alfred E. Khan] . . . the nation's new chief inflation fighter has named his foe: every American's desire for economic improvement The desire of each group with power or instruments to improve its economic situation. . .is after all what the problem of inflation is."

The solution, then, is a "Smaller piece of the pie." "The living standard of Americans must decline if inflation is to be controlled, says . . . Peter Emerson . . . a key aide to Alfred Kahn."

No matter what the cause of inflation, one thing for certain is that it is never caused by government, at least according to President Jimmy Carter, who said: "It is a myth that government itself can stop inflation."

Congress has a typical solution to the problem: impose wage and price controls on rising wages and prices. And it seems that these measures never work. Is it possible that the reason Congress can't control inflation is that Congress is not aware of its real cause? Is it possible that they are attacking the effect of inflation, and not the cause? The attempt to end inflation by the imposition of wage and price controls is not an new idea. (In fact, neither is inflation!) Free market Economist Murray N. Rothbard has gone on record as saying:

"From the Roman Emperor Diocletian down to the American and French Revolutions and to Richard Nixon from 1971 to 1974, governments have tried to stop inflation by imposing wage and price controls. None of these schemes have worked."

The reason wage and price controls do not work, and have never worked, lies in the simple fact that they attack the effect of inflation and not the cause. The proof that this statement is true can be found in a simple definition found in a dictionary. Webster's 3rd Unabridged Dictionary defines inflation thus: "An increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level."

Inflation is caused by an increase in money (credit is a result of increases in the supply of money and for the sake of this discussion, money shall be the sole cause of inflation.)

The result of inflation is a price rise.

Another dictionary, this time the Webster's Collegiate, defines inflation thus: "Relatively sharp and sudden increase in the quantity of money, or credit, or both, relative to the amount of exchange business. Inflation always causes a rise in the price level."

The cause of inflation, an increase in the money supply, always produces a price rise. Inflating the money supply always increases prices. This is an economic law: the effect of a money supply increase will always be the same.

In summary, then, inflation has both a cause and an effect:

  • Cause: an increase in money
  • Effect: a rise in prices

Now it is possible to see why wage and price controls do not work: they attack the effect (the price rise) and not the cause (the increase in the money supply.)

An example of how Inflation is caused could be offered by the use of a simple model.

Suppose that sea shells are used as money on Island A, and that the prices on the island are determined by the number of shells in circulation. As long as the quantity of shells remains relatively constant and there is no rapid increase, prices will remain relatively stable. Suppose that some of the more adventurous islanders row over to a nearby island and collect a large quantity of sea shells, identically the same as those in circulation as money on the main island. When these additional sea shells are brought back to Island A and put into circulation as money, they will cause an increase in the price level. More sea shells (money) will enable each islander to bid up the price of any given good. If the islander has more money, he can afford to pay a higher price for the product he wishes to purchase.

There are certain elements in society that wish to increase the money supply for their own benefit at the expense of the other members. These people are called "counterfeiters," and are punished for their crime when discovered. They are punished because their counterfeiting of extra supplies of money decreases the value of the legitimate money held by the members of that society. They have the illegal and immoral power to cause inflation by increasing the money supply, causing the value of the other money to drop. This activity, the counterfeiting, is actually a crime against property, the money of the society, and the citizens have the legal and moral right to seek an end to this destruction of their private property, their money.

How is it possible for inflations to persist if those who have the ability to counterfeit are punished by the public for their crime? The solution for the counterfeiters lies in making it legal to counterfeit money. Those who counterfeit can really reap the benefits for their crime if they can get control of the government and make their crime legal. The government has the ability to make even counterfeit money "legal tender" (requiring all citizens of the nation to accept the counterfeit money along with the legal money.) If government could make counterfeiting legal, there would be no crime for counterfeiting, and this became the goal of the criminals.

Those who sought to make government all powerful in the lives of their citizens soon learned that inflation could also increase the impact and scope of government as well. The marriage between the socialists and the counterfeiters was inevitable. Nobel Peace Prize winner and economist Friederich von Hayek detailed this relationship thus:

"Inflation is probably the most important single factor in the vicious circle wherein one kind of government action makes more and more government control necessary."

The government-and-inflation circle could be described also in terms of the "Pincers Movement" described by Kozak. The bottom of the pincer is the price rise, the result of the Inflation (the legal counterfeiting of the new money,) caused by the top of the pincer, the government. The people, sensitive to the rise in the prices, start demanding that the government take some remedial action to put a stop to the inflation, and government, informing the public that more government action is the solution to the inflation problem, passes the legislation. The distance between the two pincer arms shortens, until the result is total government. And all of this activity is in the name of stopping inflation.

One famous economist, John Maynard Keynes, detailed the procedure in his book, The Economic Consequences of the Peace:

"Lenin, (the Russian Communist) is said to have declared that the best way to destroy the Capitalist system was to debauch the currency.

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily, and while the process impoverishes many, it actually enriches some.

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.

"The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner not one man in a million is able to diagnose."

There are several important thoughts contained in this quote from Mr. Keynes' book. Notice that the purpose of inflation, at least according to the Communist Lenin, was to destroy Capitalism. Lenin realized that inflation had the power to destroy the free market Lenin also realized that the only agency that could cause inflation legally was the government

Inflation was also to serve as an income redistribution system. It could impoverish those who held their assets in money, and enrich others who held their wealth in items that increased in value during periods of inflation.

Inflation, to be successful, must be concealed from those who stand to lose the most: the money holders. Concealment becomes the goal of those who do the counterfeiting. Never must the true cause of inflation be properly identified. Inflation must be blamed on everything: the market place, the housewife, the greedy merchant, the wage earner, the unions, oil shortages, the balance of payments, the common housefly! Anything but inflation's true cause: the increase in the money supply.

Keynes (and Lenin) admitted that the results of inflation would constantly operate in a predictable manner. Inflation was an economic law. And "not one in a million" would be able to diagnose the correct cause.

In 1978, the United States Chamber of Commerce at its annual meeting, honored Dr. Arthur Burns, the past Chairman of the Federal Reserve System, for "his contributions to the nation and the enterprise system, during his government service." The interesting thing about this event was that Dr. Burns, as the head of the Federal Reserve, controlled the growth of the money supply. He had the power to increase the money in circulation. Therefore, he was the one who was creating inflation.

Yet the major American business organization commended Dr. Burns for his efforts in preserving the free enterprise system. The very man who was causing the increase in the money supply and therefore causing the inflation that was destroying the free enterprise system was being honored by those in the free enterprise system!

Keynes and Lenin were certainly right: not one in a million would be able to diagnose the true cause of Inflation! Including the American businessman!

On page 94 of the Chamber of Commerce's magazine, Nation's Business, an editorial informed the reader that Dr. Burns ". . has authored a broad, well-reasoned plan to turn back the inflationary threat. . ." But a review of the editorial and Dr. Burns' proposals indicates that nowhere did Dr. Burns mention the money supply, nor stopping the rapid increase of it! The past Chairman of the Federal Reserve writes, instead, that the causes of inflation are other than an increase in the money supply. No wonder that Dr. Burns is smiling as he accepts the award from the Chamber of Commerce. He has fooled the American business community.

Keynes also went on to explain why he agreed with Lenin that inflation is intended to destroy the business community, when he wrote:

"The decadent international but individualistic capitalism, in the hands of which we found ourselves after the War (World War I) is not a success. It is not intelligent; it is not beautiful; it is not just; it is not virtuous—and it does not deliver the goods. In short, we dislike it and are beginning to despise it."

If you "despise capitalism," and wish to replace the system with another that you prefer, it becomes imperative to find a way to destroy it. One of the most effective methods of destruction is inflation, the "debauching of the currency." "Lenin was certainly right."

Who is the victim of inflation? James P. Warburg correctly answered that question, when he wrote the following in his book The West in Crises: "In recent times perhaps the greatest enemy of a middle class society. . . has been inflation."

Why would the middle class be the target of inflation? John Kenneth Galbraith informed the reader that inflation is a method of income redistribution: "Inflation takes from the old, the unorganized, and the poor and gives it to those who are strongly in control of their own incomes. . . . Income is reallocated from the old to the people of middle years and from the poor to the rich."

So inflation has a purpose. It is not an accident! It is the tool of those who have two objectives:

  1. to destroy the free enterprise system, and
  2. to take wealth from the poor and the middle class and "redistribute" it to the rich.

So inflation can now be understood. The reader is now "one in a million" able to diagnose its true cause!