Inflation Is Not a Monetary Phenomenon

Idealistic, fanatical libertarians—the Mises types, Rothbardian and Randian—like to shout from the rooftop that “inflation is a monetary phenomenon.” But that’s mastery of the obvious.

Maybe there are still some five-year-olds out there who imagine inflation to be the fault of merchants raising prices so as to screw their clients and, thus also the fault of conservative politicians who support merchants. But most people grasp that more money chasing the same number of goods and services makes prices rise. To call inflation a monetary phenomenon is like the assertion that running involves legs. The real questions are why, from whom, and to where are we running?

Since money does not print itself, inflation is more than a monetary phenomenon.

It’s about governance—so it’s ideological, political, and sacrificial in nature. Ultimately, it’s theological. This is because inflation is a ritual wherein we take from some parts of the community and give to others. It’s a ritual because we want it to stay mysterious. We look away, so to speak; we accept its complexity because we’re trying to diffuse panic, envy, and sadism. In this tragic sense, the new fans of the Austrian School don’t understand the School of Salamanca from which they claim to be descended.

In the end, money is just the medium of inflation.

Inflating its supply is a way of gaining the time and funds by which we manage social conflicts and mass movements. Therefore, it’s about class or ethnic tensions. Lately, it’s even about navigating the war between the sexes. Inflation is always a matter of us versus them. Losers take from winners; winners take from losers. Which of these we are depends on who wins.

To the extent that inflation sustains a nascent or dying social order by redistributing wealth through a hidden tax, it sublimates violence. Monetary policy is warfare by other means.

Prussian general and military theorist Carl von Clausewitz famously said, “War is simply the continuation of political intercourse with the addition of other means.” The idea is reversible: “Politics is simply the continuation of military intercourse with the subtraction of its principal means.” The fact that we can flip these ideas— i.e., that war is politics and politics is war—indicates the locus of monetary policy, the holy grail of governance. It’s the ultimate means of financing the solution to any crisis.

At the frontier between politics and war, what causes one to turn into the other is often a proper or improper dose of inflation. Domestically, depending on how it’s deployed, who benefits or suffers, the relative damage to the economy, and how good it is for the society at large, inflation can either keep us together or rip us apart. In foreign policy terms, it can also mean the difference between overcoming or surrendering to an external enemy.

In domestic politics, inflation arises most frequently in the context of what classical authors called “distributive justice.” By contrast, and in theory at least, the other two classical modes of justice, criminal and civil, are simple. With criminal justice, you figure out who broke the law and decide how to punish them; with civil justice, you figure out who broke a contract and decide how to compensate the other party—simple. Distributive justice is more complicated because it ensures that everybody gets their slice of society’s pie. That’s why this mode of justice frequently muddles the other two.

Jury nullification and fake charges brought against political opponents signal the deeper group sentiments that distributive justice addresses. In the end, distributive justice is about satisfying the mob, that is, making sure certain social castes won’t grow resentful and brutish. Traditionally, inflation is the means of taxing a general populace in order to maintain a government. Traditionally, that same government’s primary concern is keeping the peace by balancing society’s coalitions. Thus, inflation is not just a monetary phenomenon. It’s a mechanism used to modulate conflict.

Maybe an alien race lands a spaceship on the White House lawn. A crisis always occasions a response by the government, which always incurs a cost. When we turn to the government to solve our problems—and can anyone honestly recall the last time we didn’t turn to the government to solve a problem?—then we have to pay for it. And we almost always do so by inflating the currency.

Inflation can be less damaging in the short term so long as economic growth outpaces it. Welfare and social programs are the “bounty” of the purchasing power siphoned away from money when a government adds to its supply and creates inflation. So long as these programs keep the right people happy and so long as the inflation that sustains them doesn’t destroy the larger economy, the ritual works. Distributive justice can be an effective way of maintaining social stability.

But no matter how you look at it, inflation, as a means of financing government programs that are thought to help people, doesn’t conform to the rigorous view of private property shared by most of the American founders.

James Madison in Federalist 44, for example, rails against “the pestilent effects of paper money on the necessary confidence between man and man.” In particular, once a government abandons the natural restrictions placed on it by using silver and gold as money, it turns to inflation to expand its sphere of influence, thus violating the rights of some individuals to benefit others. Inflation pits those who depend most on the government against those who rely relatively less on the government.

Turning to foreign policy, what greater social program is there than war?

Whether it’s pillaging other nations to offset our own failing economy or defending against an invader, war almost always brings inflation because it destroys more than it yields. If most citizens want a war, or, conversely, if most are happy when a war ends, then we all might stomach the inflation that pays for it.

But if the conflict is, in truth, internal, that is, if the so-called war being sublimated by inflation is a civil war, then the so-called monetary phenomenon grows in response. Along comes a crisis that exacerbates our differences. It can be anything: again, a war, or maybe just an economic downturn, or a more generalized “war on poverty,” perhaps a work stoppage, a plague, or even a technological or societal shift that unexpectedly changes the nature of the economy in a way that affects a whole lot of citizens. It doesn’t matter what it is. Maybe an alien race lands a spaceship on the White House lawn. A crisis always occasions a response by the government, which always incurs a cost. When we turn to the government to solve our problems—and can anyone honestly recall the last time we didn’t turn to the government to solve a problem?—then we have to pay for it. And we almost always do so by inflating the currency.

This is why inflation grows unsustainable either at the beginning or the end of a social order. And these are the same thing, i.e., the same event. It depends on your perspective and on which side of it you end up. Both the North and South during the American Civil War printed lots of money. Another way of viewing WWII is as a struggle between competing monetary regimes. A less inflationary regime in the U.S. destroyed greater inflationary regimes in Germany, Italy, and Japan. But the more inflationary regime doesn’t always lose. Pedro I and Enrique II minted competing coins in fourteenth-century Castile as the House of Ivrea succumbed to the House of Trastámara. Enrique II won, yet his money was more adulterated than that of his rival. The more inflationary regime defeated the less inflationary regime. So, during a war, inflation can also be salutary and patriotic, especially if your side wins. Maybe the side that deploys a less inflationary policy is beholden to creditors that don’t have the nation’s best interests in mind.

From the hegemonic vantage of the Pax Americana and the post-Cold War era, a still not insignificant number of citizens in Western nations imagine that once upon a time along came a new religion or a freer or more just form of government, which then proved robust if not outright invincible for many centuries. After a rocky start, Jeffersonian democracy coordinated a large agglomeration of different people in ways that allowed American civilization to succeed beyond anyone’s wildest dreams. Reducing America to the issue of economic viability, historically she’s been graced with relatively fewer bouts of inflation and smaller reallocations of wealth. High inflation and heavy reallocations are the normal course of business in many countries, and they correlate well with poverty and lack of social cohesion.

A stable money supply and a dynamic market economy are factors that can compensate for the inevitably unfair distribution of wealth, on the one hand, and the destructiveness of inflation to those who are productive, on the other. A large antifragile economy and a massively liquid currency make for more sociopolitical resilience than expected. That is, until the destruction and reallocation of wealth stop working or aren’t worth it to most people.

When this happens in the modern era, it’s often the case that the radical left threatens to destroy property and people if it can’t get its way. Meanwhile, most of the so-called moderates and those on the right know enough to stay out of cash and buy assets, hoping that inflation-financed government programs can hold the masses at bay.

At some point, however, welfare and social programs might no longer satisfy the mob, and the inflation that finances it might become destructive to the class of people it’s supposed to help. Then, the middle class and the wealthy of all political stripes have a problem: their assets will be expropriated by various means, from theft to punitive taxes. More often than not, this will happen under the approving eye of their own political representatives. Finally, a monetary phenomenon will morph back into what it always already was—a political phenomenon and, failing that, a matter of the rule of law and, failing that, violent conflict.

So, unless you think money multiplies magically all by itself, inflation isn’t a monetary phenomenon. It’s a governing mechanism that political elites use or abuse. As such, it’s a human phenomenon. Inflation is about how or how not to live the good life, but it’s also about a short list of deadly alternatives, including crime, rebellion, tyranny, and anarchy.

Portrait of Carl von Clausewitz by Wilhelm Wach — Wikipedia


  • Eric-Clifford Graf

    Eric-Clifford Graf (PhD, Virginia, 1997) teaches and writes about the liberal tradition as authored by men like Alexander Hamilton, Frederick Douglass, and Jorge Luis Borges. His latest book is ANATOMY OF LIBERTY IN DON QUIJOTE DE LA MANCHA (Lexington, 2021). All of his work can be found here:

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10 thoughts on “Inflation Is Not a Monetary Phenomenon

  1. As one of those Rothbardians that Mr. Graf seems to look upon with some disapproval, I find this post rather insulting. It suggests that the statement “Inflation is always and everywhere a monetary phenomenon” is just a poorly thought out slogan. Not so. The wisdom it expresses is, I maintain, unchallengeable: You never have generally rising prices unless you have first had an expansion of the amount of money in circulation. And it’s also unquestionable true that if you have generally rising prices, the reason is monetary expansion, and not some other cause such as business greed. Mr. Graf is correct to point out that there’s more to the story. Of course, money cannot multiply itself. Austrian School economists are perfectly aware of that and point out that some governmental action is necessary. In ancient Rome, the government debased its coinage by substituting cheaper metal for silver. In Germany and other nations in the 20th century, the government ran the printing presses to manufacture more money. The US government inflates the money supply through the machinations of the Federal Reserve, thus enabling the government to spend far more than it takes in through taxes. Why governments do this is easily grasped — officials want to extract wealth from society to spend as they desire, but without having to do the unpopular thing of explicitly increasing taxes. That was as true in ancient Rome as today in Washington, DC. I agree with Mr. Graf that we must find a way to defeat the political disease of limitless governmental spending that is the underlying cause of inflation. The United States tried to keep government spending under control by writing into the Constitution limits on what the government could legally spend on — see Article I, Section 8 — and by establishing a hard money system where money had to be backed by gold. Sadly, our “progressives” managed to tear down both the Constitution’s spending restrictions and to demolish the gold standard in favor of fiat money. If we are to avoid irreversible social and economic decay, we must cure the spending impulse. People need to be taught that federal goodies come at a great hidden cost. It does not help in that regard to declare that inflation is not a monetary phenomenon.

    1. A Rothbardian who gets insulted. What’s next? A Randian who feels abandoned? 😉
      The slogan “inflation is a monetary phenomenon” is indeed a poor one. It aims well below and behind the target. It reminds me of that other slogan “taxation is theft.” Neither expression advances any political conversation whatsoever. In particular, and I had hoped to have made this clear–maybe I did not–, inflation is a *sacrificial* phenomenon, which means that a new rite (a reformed constitution) will be necessary to put the genie back in the bottle. And when the day comes that a majority of Americans want that new rite, they will be suffering greatly from the effects of inflation, so that new rite won’t come without a cost either. Knowledge also comes at a cost. Libertarians too often flaunt theirs to the detriment of their own cause. Witness their recent convention.

      1. I had hoped for a more enlightening or at least more civil reply, but more sarcasm was in the offing.

        Evidently, the writer is not familiar with the Austrian School analysis of money and credit, but nevertheless thinks it worth attacking. The statement that inflation is always a monetary phenomenon is no more a “slogan” than is saying that minimum wage laws tend to create unemployment. Both are true and I don’t think there is any better way to express those economic realities. Does Graf have an improvement to suggest? If so, I’d like to hear it — but not an irrelevant jab at the Libertarian Party or any other distraction.

    2. Sarcasm in response to a rather common appeal to hurt feelings, and by a Rothbardian no less, is appropriate. One point I would make is that politics are not irrelevant. The Libertarian party’s antics have consequences in a country divided down the middle. The party that claims to understand inflation (and nearly everything else) more than the rest of us also punishes us by deciding we have to lose because we lack their principles. It’s childish. Politics 101: if you can’t win first, the rest is irrelevant. I’ve heard as many libertarians call Trump Hitler as I have Democrats. And just like Democrats, libertarians retreat to their superior morality and knowledge. We don’t adhere to the Constitution. Duh. Inflation is a monetary phenomenon. Duh. Inflation is a tax. Duh. Who doesn’t know these things? Libertarians seem most unwilling to acknowledge that money, taxes, and politics are aspects of a larger struggle between the two solid camps of a divided nation. This means that if you can’t offer something in exchange for others acceding to the implications of your slogan, then you’re just a sloganeer. I’ve yet to hear a libertarian offer anything in exchange for auditing the Fed, for example. If you want the nation to adopt bitcoin, what are you willing to do in exchange? A redistributive tax on bitcoin? A new education system with a different structure and different financing? A border wall? How about more police? A whole lot of people lose out in the short run when you change any major policy, so something has to be offered. Money has been the site of political conflict since the Book of Daniel. How does reminding us of this advance the ball?

  2. ERIC-CLIFFORD GRAF: Idealistic, fanatical libertarians—the Mises types, Rothbardian and Randian—like to shout from the rooftop that “INFLATION IS a MONETARY phenomenon.” But that’s mastery of the obvious.
    [First paragraph]

    ERIC-CLIFFORD GRAF: So, unless you think money multiplies magically all by itself, INFLATION ISN’T a MONETARY phenomenon.
    [Final paragraph]

    Unlike the “idealistic, fanatical libertarians” this modern professor has no difficulty in writing a pile of hogwash to “justify” contradicting himself. He must be a modern professor in a modern academic setting (who is long on bitcoin because it multiplies its value almost by “magic”). One can’t expect too much from a professor who dissects the “anatomy” of “liberty” in a fictional novel. Fiction is as fiction does.

    Inflation is nothing other than fraud. When you have no money and write a cheque, the cheque bounces. When you are a “government” with no money (despite taxation powers) and the cheque must be honoured (by law) then the currently official money (currency) bounces. Everything else is a waste of words “justifying” fraud.

    Kevin James “Joseph” Byrne

    1. Too simplistic Kevin. By the way, I’m not a professor, but I appreciate your truckload of ad hominem regarding that profession! Keep up the good work. If there’s a mode of inflation that needs immediate attention, it’s academia. And reasoning with them will only get you so far; you’ll have to hurt them or trade with them to make a dent. Also, I’m having trouble seeing how my two statements which you cite are in any way a contradiction. Also, accusing the government of fraud is more mastery of the obvious. If libertarians ever get serious, they’ll learn to give in order to get, but since they prefer principles and the intellectual high ground, I won’t hold my breath. Finally, an “anatomy” is a genre term from the sixteenth century, and “fictional novel” is probably a tautology. I’d suggest that here is a large part of the problem. Libertarians don’t appreciate art or subtlety. They prefer bitch fests, heavy-handed allegories, and reams of political and economic treatises. ZZzzzz… Why not just call your party The Asperger’s Syndicate or High-Tech Sausage Fest?

      1. I published Graf’s piece because it challenges traditional economic thought. MTC is dedicated to challenging the status quo, and, though many disagree with Graf’s perspective, he did that here.

  3. All of this is true, but there are two other things to be remembered.

    First, as your population increases, as your economy expands, your money supply has to also inflate lest you have too few dollars chasing too many goods. Otherwise you will have deflation and that can cause as many problems as inflation.

    Second, while a shortage of hard currency will create a functioning barter economy, it will also create political instability because barter can neither repay loans nor pay taxes — this is what caused Shay’s Rebellion which very nearly toppled the fledgling US Government — if they’d manage to capture the Springfield Armory, it likely would have.

    A little bit of inflation, 1%-2% annually, is generally considered to be a good thing.

    1. Correct, Dr. Edega, though deflation is probably not an issue again in our lifetimes. The early modern variation of the problem you note was the billon coin in Spain. It was inflationary, but also necessary. The smaller denomination coin had to be in play for the economy to work. Somebody had to produce it and it fell to the Crown. At the same time, gold coins were so cherished as stores of value that they got taken out of circulation too fast (per Gresham). The massive silver mines in Latin America greatly alleviated this problem, but since newer issues were ever subject to adulteration as taxation, these also tended to vanish. So a kind of race to the bottom in the value of such coins was built into their necessity. The issue is far more complex than pundits of any stripe maintain. I like Twain’s essay “Corn-Pone Opinions,” 1901. He basically says that anyone who says they know for sure on such issues is blowing smoke up your arse. That said, I am painfully long BTC as of this writing. It’s a brave new world.

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