What Is Inflation?
Look for the source of a society’s collapse, and you’ll usually find the i-word (inflation) at its core. So what exactly is inflation? How does it work? Why is it so dangerous? And how does it affect your everyday life? Steve Forbes breaks it down.
Inflation isn’t new.
This man-made disaster has bedeviled civilizations at least since Ancient Rome.
In order to pay for his extravagant expenses, the first-century Roman emperor Nero debased the Roman currency, the denarius. How did he do it? By replacing silver, which was valuable, with copper, which was not.
And that was just the beginning.
Rome’s corrupt governments debased the coinage on a regular basis. By the fourth century, the price of wheat was two million times higher than it had been in the mid-second century. By the fifth century, Rome was finished—overrun not by barbarians, but by inflation.
In the sixteenth century, English King Henry VIII did essentially the same thing with England’s coinage to pay for his wars, divorces, and debaucheries. In what became known as the Great Debasement, food prices soared. Ultimately, Henry left it to his daughter, Queen Elizabeth I, to clean things up by issuing new, high-quality coinage, setting the stage for the emergence of England as a great power.
The Continental Congress of the American revolution tried to print its way out of its money problems by paying soldiers with paper money. The first US currency, the Continental dollar, was so over-printed that it became “confetti”, collapsing into hyperinflationary oblivion. Alexander Hamilton, the first treasury secretary, saved the day by linking the US dollar to gold.
Figures like Elizabeth I and Alexander Hamilton are rare. These stories usually end badly. In the 1920s, rampant money printing by the Weimar Republic in Germany led to hyperinflation, economic collapse, and ultimately, the rise of Adolf Hitler. Argentina, once the most prosperous country in South America, has never really recovered from its wild money printing in the 1950s. And Zimbabwe, now one of Africa’s poorest and most corrupt nations, is infamous for its one hundred trillion dollar bill.
Look for the source of a society’s collapse, and you’ll usually find the i-word.
So what exactly is inflation?
There are two types: non-monetary and monetary.
When a hurricane slams the Gulf of Mexico, interrupting fuel production, the price of gasoline rises. This is non-monetary inflation—the rise of prices due to some external event. Over time, the market recovers and prices normalize.
Monetary inflation is something entirely different. It’s the distortion of prices that occurs when money loses value. It’s that feeling that something isn’t right. Why is my weekly grocery bill, which used to be $100, now $200?
Because your money is losing value. It’s not that bananas have suddenly become more valuable. It’s that your money has become less valuable.
This can happen rapidly—as we’ve seen since 2021—or slowly over time. For example, in 1970, a can of Coke cost a dime; a Big Mac 65 cents. Fifty years later, a Big Mac is five bucks, and you’d be lucky to get a soda out of a vending machine for two dollars. Obviously, these products haven’t changed. It’s the dollar that’s worth far less.
This slow-motion devaluation of the dollar is why young people today can barely make rent when, years ago, their parents, who made far fewer dollars, could buy a house. Their dollars were worth much more.
If you feel cheated by that, I don’t blame you. You have been.
So where should your anger be directed? You can start with our 37th president, Richard Nixon. The worst thing he did was not Watergate. It was taking us off the gold standard in 1971, which Alexander Hamilton had put in place two centuries prior. This allowed the federal government to print dollars more or less at will.
Had the US dollar stayed connected to the gold standard, it’s estimated that today’s economy would be at least 50% larger than it is. In a universe without inflation, you could buy that house.
So what is the dollar’s value linked to now, if not gold? Nothing more than faith—the faith that the money you have today will be worth the same tomorrow, next year, and the year after. But it becomes harder and harder to maintain that faith as the U.S. government prints trillions of dollars to pay for its outrageous spending.
The most devastating effect of inflation is its impact on social trust. Money, after all, was invented to enable trade between strangers by providing a mutually agreed-upon unit of value. It is a facilitator of trust. Without that trust, trade, social relationships, and life as we know it ultimately unravel.
So are we doomed to this fate? No. Just like England wasn’t and America wasn’t at its founding.
We must once again link the dollar to a stable anchor; gold or some other trustworthy standard.
The time to start that debate is now.
Or we will go the way of Rome. You can bet your bottom denarius on it.
I’m Steve Forbes, co-author of Inflation: What It Is, Why It's Bad, and How to Fix It, for Prager University.