Words have meaning, and definitions can become ambiguous and 'slippery.' Language naturally evolves as words change over time, but frequently a key meaning is lost and there is no longer a single term to define a notion. This has been the case with the term 'inflation,' a prevalent one.
I've been compiling quotes over the past few years about the proper definition of inflation (and I'm always seeking for more ones). The realization that price inflation—rising consumer prices—is what most people mean and comprehend by the term "inflation" served as the impetus for this list. However, this is a result of inflation, not inflation itself. In fact, when the government was spending a lot of money, a former coworker and acquaintance questioned me, "Where is the inflation?" I answered, "It already happened." We must go back to the original description of inflation. If not, the role of the government and the central bank is hidden.
Inflation is, generally speaking, the artificial expansion of money and credit (i.e., "printing money"), however there has been significant discussion within the Austrian school, even distinguishing between Ludwig von Mises and Murray Rothbard's perspectives. The central bank or banks using fractional reserves may commit this crime (often with prior approval from the government to the central bank). In his essay "Inflation and Price Control," Mises discussed how this definition modification would be detrimental:
The term inflation is used with a new connotation. What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless. (emphasis added)
Mises again referred to the consequences of such a definition in Human Action:
The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism. (emphasis added)
Mises continued:
There is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name. Statesmen and writers no longer have the opportunity of resorting to a terminology accepted and understood by the public when they want to question the expediency of issuing huge amounts of additional money. They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with the subject. As this policy has no name, it becomes self-understood and a matter of fact. It goes on luxuriantly. (emphasis added)
Likewise, Henry Hazlitt agreed with Mises and wrote a short essay that is not as well-known as it ought to be—“Inflation in One Page.” In this masterful summary, Hazlitt explains:
Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices. Therefore inflation—if we misuse the term to mean the rising prices themselves—is caused solely by printing more money. For this the government’s monetary policies are entirely responsible. (emphasis added)
Rothbard’s definition of inflation differed slightly from Mises’s and was arguably a bit more precise but in the same spirit. In a recent article in the Quarterly Journal of Austrian Economics, “What Is Inflation? Clarifying and Justifying Rothbard’s Definition,” Kristoffer Hansen and Jonathan Newman clarify and agree with Rothbard’s definition of inflation, noting that Mises defined inflation as the increase in the money supply not offset by an increase in the demand for money, but Rothbard defined it as issuing “pseudo warehouse receipts” or issuing money in excess of the stock of specie (e.g., gold). Rothbard described inflation as follows:
The process of issuing pseudo warehouse receipts or, more exactly, the process of issuing money beyond any increase in the stock of specie, may be called inflation [italics original]. . . . The profit is practically costless, because, while all other people must either sell goods and services and buy or mine gold, the government or the commercial banks are literally creating money out of thin air. They do not have to buy it. Any profit from the use of this magical money is clear gain to the issuers. (emphasis added)
In The Progressive Era, Rothbard explained further:
While Mises and Rothbard disagreed on whether or not fresh gold inflows should be included in the definition of inflation, they both agreed that inflation is an increase in the supply of money and credit rather than a rise in prices. Additionally, they both concurred that business cycles and asymmetrically rising prices are frequent effects of inflation.
The terms “inflation” and “inflationary” are used throughout this article according to their original definition—an expansion of the money supply—rather than in the current popular sense of a rise in price. The former meaning is precise and illuminating; the latter is confusing because prices are complex phenomena with various causes, operating from the sides of both demand and supply. It only muddles the issue to call every supply-side price rise (say, due to a coffee blight or an OPEC cartel) “inflationary.” (emphasis added)
Why did the definition of inflation alter if it was so clear-cut and undisputed?
The ideological and political conflict between the British banking school and the British currency school (as well as their American counterparts) provides the solution. The currency school, which advocated hard money more strongly, initially won and had the chance to have their recommended policy changes carried out by the Bank of England. Their definition of inflation was recognized at the time. In his book Money, Sound and Unsound, Dr. Joseph Salerno argues that "the term 'inflation' was now strictly used to denote an increase in the supply of money that consisted of the creation of currency and bank deposits unbacked by gold."
Sadly, despite accurately defining inflation, the proponents of the British currency school, unlike their American counterparts, neglected to take demand deposits into account when calculating the money supply. Because of this, the currency school earned a bad reputation because its policies, as implemented in Great Britain, failed to stop price inflation and the business cycle. A subtly revised definition of inflation would now be "a supply of circulating media in excess of trade needs."
The definition would get more skewed over time. Milton Friedman's definition, for instance, even though it appears to be technically accurate, incorporates a number of false assumptions: "[Inflation] is a financial phenomenon that occurs everywhere and always. It happens everywhere and always as a result of having too much money and a faster increase in money supply than in output.
Friedman is accurate that inflation is always a monetary phenomena; but, monetarists have various definitions of "money" and "money supply," and they see money as a tool for adjusting policy through inflation. Finally, from 1936 onward, the Keynesian revolution would continue to redefine inflation to entail a broad rise in the so-called price level. Salerno claims:
Before World War II, when the terms “inflation” and “deflation” were used in academic discourse or everyday speech, they generally meant an increase or a decrease in the stock of money, respectively. A general rise in prices was viewed as one of several consequences of inflation of the money supply; likewise, a decline in overall prices was viewed as one consequence of deflation of the money supply. Under the influence of the Keynesian Revolution of the mid-1930s, however, the meanings of these terms began to change radically. By the 1950s, the definition of inflation as a general rise in prices and of deflation as a general fall in prices became firmly entrenched in academic writings and popular speech. (emphasis added)
As Mises said, we cannot fight a policy that we cannot name. It is high time we clarified and implemented the true definition of inflation. If we can convince people that inflation means “printing money” artificially and then explain the consequences, this will help them understand what government has done to our money.
