How You Contribute to Monetary Inflation


A few weeks ago, I had the privilege of speaking to a small gathering of churchgoers about the causes, dangers and morality of monetary inflation—a topic about which I wrote recently. The audience was great and followed up the presentation with several thoughtful and challenging questions.

One in particular stood out: “Are there ways that we—well meaning, moral and informed people—unknowingly contribute to our nation’s culture of inflation and excess spending?”

It was a great question, and one I admittedly did not know how to answer at the time. But after some days of pondering, I have identified three ways in which even the most virtuous of us fuel our culture’s (and government’s) addiction to inflation.

First: Going into debt.

I don’t believe acquiring debt is always a bad decision. Given a particular circumstance, it may even be the most prudent choice. But debtors face a temptation to favor inflation that is difficult for even the most honorable of people to overcome.

The fact is, when money is debased through inflation, debtors gain the difference. If I borrow $10,000 tomorrow to fund a new car, I gain (at the expense of my creditor) from whatever debasement of the dollar occurs as I’m paying it back. If the dollar has lost five percent of its value by the time I start paying off the loan, I will be paying back five percent less in real terms.

That said, by going into debt, one exposes himself to moral hazard that too easily makes a principled opposition to excessive inflation take a back seat to the short-term gain that occurs in an inflationary environment. And when everyone is a debtor, preventing inflation via representative government becomes virtually impossible.

Second: Spending too much and saving too little.

Even if your personal finances remain in the black, spending too much as a percentage of your income lessens the harm that inflation has on your personal finances. This—like inflation—creates dangerous moral hazard.

For example, someone who spends 95 percent of his income each week has very little savings to actually be devalued in an inflationary environment. And assuming wages periodically adjust, inflation can be almost meaningless—he loses nothing. Price changes for him are strictly nominal and inflation does not affect his wealth.

On the other hand, someone who prudently saves 50 percent of his income each week stands to lose as the dollar is progressively devalued. What he put away in the past becomes worth less and less as inflation runs its course, making the accumulation of wealth over time exceedingly difficult.

Therefore, by spending too much money, one stands to lose very little from inflation, and in turn has little incentive to exert pressure on officials to refrain from inflating the money supply.

Third: Voting “single-issue.”

It is a known fact that most Americans vote for a candidate based on his or her belief on two or three particular issues. Taxes, spending, abortion … these issues make and break elections.

But monetary policy, while complex difficult to understand, is just as important as any other political issue. Voters should consider candidates monetary views when deciding who to support. Indeed, the nature of money as a universal medium of exchange means bad monetary policy harms everyone, and is thus a very important policy area. Bad money corrupts a rational economic order, and ignoring this issue when voting makes one as responsible for inflation as those who actively promote such policies.

Voters everywhere should keep their representatives accountable on the issue of monetary policy like they do on the other “mainstream” issues.

These are three ways in which well-meaning, informed people unknowingly contribute to our nation’s culture of excessive inflation. Consider yourself warned, however, and take measures to protect yourself from your own selfish heart.

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Where Money Meets Morality

If there’s one political issue that puts America to sleep, it’s monetary policy.

Yes, most will concede that monetary policy is important. But the fact is, between all the M1s, M3s, CPIs, PPMs, and Vt=(nT/M)s, the average person gets lost in what appears to be a hopelessly complex system of regulation and statistical modeling.

This is regrettable, considering the profound influence money has on our well-being. Even more unfortunate is the fact that many otherwise well-informed citizens “defer to the experts” for practicality’s sake, believing that educated monetary officials cannot possibly propose a policy that is counterproductive, let alone immoral.

But monetary policy is no less vulnerable to moral abuse than is any other political issue. Indeed, monetary policy undergirds a huge part of human life, affects every other political decision, and has a deeply moral component that should concern any informed observer.

For example, the Old Testament—sacred to three of the world’s major religions—contains commands regarding money that are essentially ignored by modern-day policymakers, liberal or conservative. Granted, many of these commands rest on implicit assumptions, but they are obvious assumptions nonetheless.

When God commands his people to use “honest scales and honest weights” (Leviticus 19:36), laments that Israel’s “silver has become dross” (Isaiah 1:22), and is said to consider “diverse weights” and “false balances” an abomination (Proverbs 20:23), it becomes easy to understand money as an area of human commerce with which God’s law is concerned.

This is because in ancient times, inflating the currency did not involve complex procedures like “quantitative easing” or extending credit on fractional reserve. Rather, inflation was achieved by coin-clipping or other deceptive measures designed to make phony coins appear to be real. This is aptly called “counterfeiting” today, and is not considered morally justifiable.

But while most Americans today recognize that counterfeiting is dishonest, many do not hold monetary officials responsible when they take a roundabout approach to doing the same thing. When the Federal Reserve adds a few zeros to the end of its balance sheet in order to buy Treasury bonds, they create money out of thin air. This money was not earned—it was simply contrived into existence.

Certainly some will disagree. This sort of monetary expansion, they will say, is necessary during economic recessions. I’ll leave that argument to another day. But the conflict remains: How can one defend “just weights and measures” while advancing a policy that would have the money supply altered—distorting its true value—by majority vote?

But religious concerns aside, monetary inflation harms people—especially the very poor and those on a fixed income. Unfortunately, most people who are being cheated by inflation probably don’t know it, believing instead that policymakers would not inflate the currency if it were not good for their constituents.

But when the government increases the money supply, every dollar you have is suddenly worth a little bit less. All that money you have been saving up over the past ten years is not worth as much as it was when you started to put it away. Saving becomes slower and more difficult.

Yes, wages will eventually adjust to account for the devalued dollar. But this takes time—a lot more time than it does for grocers to change the label on their loaves of bread or bottles of milk. And for those on a fixed income, wage increases are very rare indeed.

Needless to say, inflation equals a sort of theft by those who use the newly created money to serve their own ends, for their new purchasing power is earned at the expense of everyone else.

It should be obvious now that monetary policy is something that should concern those who profess an allegiance to a higher moral code, and especially to those who claim belief in the Judeo-Christian God. The issue is far from black-and-white, but caution—not apathy—should be our approach to this important issue.

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Power Outages and the Invisible Hand

You’d think that downed traffic lights would cause chaos, confusion and road rage on steroids. Aren’t human beings too greedy and self-serving to be allowed to drive without traffic lights at even the smallest of intersections?

But my experience in the aftermath of a terrible storm last weekend proved that selfish human beings are far more capable of cooperation than critics give them credit for.

I live about 20 miles west of Washington, D.C. For those of you who don’t know, that means I witnessed a nasty storm last Friday night—one that left hundreds of thousands in the region without power.

Included among the power outages were hundreds of local traffic lights. As I drove around this weekend looking for air-conditioned stores, I made my way through dozens of busy intersections with no lights, signs or police to direct the heavy traffic.

While such a scenario sounds daunting, I was pleasantly surprised by what I saw. D.C. drivers are usually known for being overly aggressive. But the unusual circumstances had everyone driving more slowly and carefully. When drivers came to a downed traffic light, they all stopped to allow the earliest arriver to go first. Drivers were waving, directing and nodding to each other to make their intentions known and ensure they did not get hit. All of this only due to their own selfish desire to avoid pain and loss of property—to stay as far away from other cars as possible.

It really was a remarkable sight, and one I did not expect to see. But why do I write about this here?

Because while social cooperation without coercion is a natural part of day-to-day life, many seem to forget this is possible when formulating economic policy.

From the time we are children, we are taught that we need certain laws and regulations (like traffic lights) to protect us from each other. Without them, we are told, nothing would ever get done—human beings are simply too self-serving to be able to function without these expansive and sometimes cumbersome regulations.

But in the same way that D.C. drivers this weekend did not all die while racing through broken traffic lights, individuals in a free economy—seeking their own self-interest—engage in social cooperation without coercion that makes everybody happier.

Adam Smith famously illustrated this with the “invisible hand” analogy. “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest.”

It is a basic principle, and one that even the most cursory review of basic economics will make clear. In the same way that seeking one’s own safety on the roads means indirectly seeking the safety of other drivers, seeking one’s own self-interest as an economic agent brings benefit to all.

Many in power seem to forget this, however. Even where there are no problems, many policymakers propose regulation that they allege will prevent possible problems that may arise in the future. And even where voluntary cooperation has worked for centuries—like creating money or providing for the poor—government intervenes and regulates, claiming that without their supervision everything would fall apart.

But human beings are not so evil. Yes, they are selfish—but it is precisely this that ensures a level of social cooperation. As each seeks his own preservation, he empowers his neighbor to do the same.

Even during a time as chaotic as the aftermath of a terrible storm, the invisible hand works wonders. Self-interest—this time in the form of avoiding pain and property damage—ensured social cooperation on the roads and spontaneous order undirected by any coercive agent.

Perhaps policymakers ought to drive more often.

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