- The Washington Times - Wednesday, November 16, 2005

Last month, President Bush nominated Dr. Ben S. Bernanke, chairman of the Council of Economic Advisers, as chairman of Federal Reserve Board to replace the retiring Alan Greenspan. Mr. Greenspan’s replacement comes during heightened fears of inflation due to the recent oil price spike.

First, let’s decide what is and is not inflation. One price or several prices rising is not inflation. When there’s a general increase in prices, or alternatively, a reduction in the purchasing power of money, there’s inflation.

But just as with diseases, describing a symptom doesn’t necessarily indicate a cause. Nobel Laureate and professor Milton Friedman says, “Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.” Increases in money supply constitute inflation, and a general rise in prices is the symptom.

Let’s look at that with a simple example. Pretend several of us gather to play a standard Monopoly game that contains $15,140 in money. The player who owns Boardwalk or any other property can sell it for any price he wishes. Given the money supply in the game, a general price level will emerge for all trades. If some property prices rise, others will fall, thereby maintaining that level.

Suppose unknown to other players, I counterfeit $5,000 and introduce it into the game. Initially, that gives me tremendous purchasing power, whereby I can bid up property prices. After my $5,000 has circulated through the game, there will be a general rise in the prices — which would have been impossible before I slipped phony money into the game.

My example is a highly simplistic example of a real economy, but it permits us to make some basic assessments of inflation.

First, let’s not allow politicians to deceive us, and escape culpability, by defining inflation as rising prices, which would allow them to pretend inflation is caused by greedy businessmen, rapacious unions or Arab sheiks. Increases in money supply constitute inflation, and the general rise in the price level is the result. Who’s in charge of the money supply? The government, operating through the Federal Reserve.

There’s another inflation result that bears acknowledgment. Printing new money to put into the game makes me a thief. I’ve obtained objects of value for nothing in return. My actions also lower the purchasing power of every dollar in the game. I’ve often suggested that a person charged with counterfeiting should tell the judge he was engaging in monetary policy.

When inflation is unanticipated, as it often is, there’s a redistribution of wealth from creditors to debtors. If you lend me $100, and over the term of the loan the Federal Reserve increases the money supply in a way that causes inflation, I repay you with dollars that have reduced purchasing power.

Since inflation redistributes (steals) wealth from creditors to debtors, it helps us identify inflation’s primary beneficiary. That is easy if you ask: Who is the nation’s largest debtor? If you said, “It’s the U.S. government,” go to the head of the class.

So what about the president’s nomination of Ben S. Bernanke as Alan Greenspan’s replacement? I know little or nothing about the man. I do know it’s not wise for one person, or group of persons, to have so much power over our economy.

Here’s my recommendation for reducing that power: Repeal legal tender laws and eliminate all taxes on gold, silver and platinum transactions. That way, Americans could write contracts in precious metals and thereby reduce the ability of government to steal from us.

Walter E. Williams is a professor of economics at George Mason University and a nationally syndicated columnist.



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