Vous êtes sur la page 1sur 2

The single most important principle with respect to inflation is Milton Friedmans now-famous

aphorism: Inflation is always and everywhere a monetary phenomenon, he wrote in Money


Mischief. Central bankers, economists, and economic journalists should use this as their
screensavers. Inflation occurs, Friedman continued, when the quantity of money rises
appreciably more rapidly than output, and the more rapid the rise in the quantity of money per
unit of output, the greater the rate of inflation. This can occur either by actually printing money
or by the magic of the bookkeepers pencreating new deposits on the banks books.
To understand Friedmans aphorism, consider this thought experiment (which I proposed last
year in The Freeman): Suppose that tonight, as we sleep, Harry Potter flies across the country
and waves his magic wand in a money-doubling charm. The charm has no effect on the amounts
of goods and services; it affects only money. Every nickel becomes a dime, every quarter
becomes a 50-cent piece, every dollar becomes two, every ten-dollar bill becomes a twenty,
every checking account doubles its balance. What would we expect to happen to prices over the
next day or two?
Even if no one knew that everybody elses money holdings had also increased, we would expect
to see prices rise substantially over the next weeks and months as sellers discover that they can
charge more for their goods than they could yesterday. Picture automobile dealerships: as people
perceived an apparent sudden increase in wealthits not wealth, its just money, but they
dont know that yetmany of them would head out excitedly to buy a new car. The dealerships
would see many more customers than before, willing to pay much more than before. Very
quickly the dealers would raise their prices, realizing that they can charge more for the cars on
their lots (which are no more numerous than before). A similar process would occur at every
store, market, online retailer, and real-estate agency in the land, and very quickly prices of just
about everything would approximately double. After all, with the same amount of stuff to buy
but twice the money to buy it with, what else would we expect?
Inflation is always and everywhere a monetary phenomenon. That means that if inflation is
occurring, the quantity of money must be (or have been) increasing. Correspondingly, if the
quantity of money is increasing (more rapidly than output), then inflation must surely result.

Increasing the Money Supply

Next, what increases the quantity of money and how? In the United States, the Federal Reserve
Systemand only the Fedcontrols the quantity of money. Therefore the Fedand only the
Fedis responsible for any inflation that occurs in the United States.
Some readers may remember discussions in their macroeconomics courses of demand-pull
inflation or cost-push inflation, which suggest that inflation can be caused by too much
consumer demand or excessive wage agreements with unions. This is mistaken. Rising consumer
demand or wage demands cantransmit inflation into the economy, but not cause it. The cause is
an increase in the quantity of money, and the Fed controls the quantity of money.
(It is true that the Feds control over the quantity of money is not total; other factors such as the
currency ratio and the required and excess reserve ratios influence the quantity of money a little.
But their effect is trivial compared to the Feds control of what is known as the monetary base.
The difference is analogous to that between the tide and other factors in determining the water
level in a bay: while wind-caused waves and boat wakes alter the water level a little over short
periods of time, the level is fundamentally determined by the tide. Furthermore, historical
changes in the currency and excess reserve ratios have largely been a response to changes in the
monetary base; they have not come about independently.)