The Distortion of the Term “Inflation” and the Government’s Shell Game

Language is not only a tool of communication, but also a tool of perception and thought. So when the meaning of the terms we use is distorted, the perceptions and ideas of those who use those terms—and the actions based on them—are distorted as well, resulting in social confusion. That is why Confucius said, “If names are not correct, affairs cannot be carried out, and the people will not know where to put hand or foot.”

In economics, one of the most representative terms whose meaning has been corrupted is “inflation.” Today, inflation is commonly used to mean a general rise in prices or simply high prices. When people say that life has become difficult because prices have risen so much recently, they sometimes say that inflation has swept over the economy. The fact that the “green onion price” became an issue in the last general election is also one example of understanding inflation as rising prices. In this way, once inflation is understood as a rise in prices, various factors are then mentioned as its causes. For example, it is said that the Russia-Ukraine war caused inflation by driving up raw material prices, and that the COVID-19 pandemic caused inflation by disrupting supplies of raw materials and components, thereby raising costs. As a result, policy recommendations are also made that responding to inflation requires a comprehensive analysis of the economy as a whole. But if inflation is understood in this way, it becomes essentially vague and impossible to know what its cause really is and who is responsible for it. More often than not, greedy firms are blamed for raising prices solely to increase profits.

Originally, the term inflation meant the expansion of the money supply itself. In the old days, when gold coins were used, the king would collect those coins, melt them down, and mint new ones mixed with metals other than gold or with less weight than claimed before returning them to circulation. In this way, the king could mint a larger number of gold coins, and the extra coins produced in this manner went into the royal treasury. It was precisely this kind of expansion of the money supply that was called inflation. In other words, an increase in the money supply was inflation itself. And because of this increase in the money supply—that is, as a result of inflation—prices rose. In the past, when gold coins were used, the money supply was expanded by collecting and reminting coins, but today, with paper currency, the money supply can be expanded virtually without limit simply by running the printing press.

Inflation is a kind of embezzlement. As mentioned above, the king increased the number of coins and filled his own pocket with the excess. In the process, resources moved from the people’s pockets into the king’s. Even in the modern age, when paper money is used instead of gold coins, the fact that inflation is a kind of embezzlement remains unchanged. This is precisely why people say that high prices are making life difficult.

If we recover inflation’s original meaning—that the expansion of the money supply is inflation itself—then the actor that causes inflation becomes clear, and with it, who caused rising prices and where responsibility lies also becomes plainly visible. It is none other than the government and the central bank. Naturally, the government wants to conceal this fact. On this point, the economist Mises said: “To avoid being blamed for the disastrous consequences of inflation, the government resorts to a semantic trick. It tries to shift the meaning of the term inflation. It calls inflation its inevitable consequence, rising prices. It is anxious to make people forget that this rise in prices is produced by an increase in the quantity of money. It never mentions this increase in the quantity of money. It shifts the responsibility for the rising cost of living onto business.”

As recent news shows, voices are growing louder demanding wage increases from companies on the grounds that inflation has reduced real wages. But in truth, workers and businesses alike are all victims suffering from inflation created by the government. The perpetrator has hidden away, while the victims are fighting among themselves. Instead of rushing to businesses, people should be rushing to the government and demanding that it immediately stop its inflationary policies and immediately halt the expansion of the money supply.

Hyeokcheol Kwon, Director of the Free Market Institute

---

Original title: ‘인플레이션’ 용어의 왜곡과 정부의 숨바꼭질 놀이

Author: Hyeok-cheol Kwon

Date: 2024-06-26

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=2&idx=26735