A Basic Definition. Inflation is not just an increase in prices. It is not, for example, and increase in the price of generators due to a disaster-caused shortage. Eventually the price of generators will return back to its previous price in the absence of genuine inflation.
Inflation is manifest in a more general rise in all prices in an economy.
Thomas Sowell, in Basic Economics, defines inflation as
An increase in the amount of money, without a corresponding increase in the supply of real goods, means that prices rise–which is to say, inflation.
Basic Economics, p. 263
How Inflation Becomes Hyperinflation. The value of money (and the value of the stock market–think about that one for a minute) is subject to the whims of people. This is why inflation can get easily out of control. This is why the Federal Reserve needs to be put out of business.
Thomas Sowell, in Basic Economics, tells the story of Russian hyperinflation at the time of World War I. In an effort to stimulate the economy, win the war, and win against the Bolsheviks, the Russian government injected increasing amounts of money into the system. By 1921, there was hundreds of times more money in the economy than in 1913. Interestingly enough, while the money supply increased by orders of hundreds in magnitude, prices had increased by orders of thousands.
During the drastic decline in the value of the Russian ruble in 1998, a Moscow correspondent reported:
“Many are hurrying to spend their shrinking rubles as fast as possible while the currency still has some value.”
Basic Economics, p. 263
Ron Paul, in The Revolution: A Manifesto, tells a similar story of Weimar Germany after World War I. In 1923 (following the extremely damaging reparations required of Germany at the Versailles Treaty), the French occupied Germany’s Ruhr Valley. To sock it to the French, the German government paid its industrial employees in the Ruhr for not working. As the government printed extra money, people gradually noticed that their money was losing its value. Because they came to recognize that printing extra money guaranteed that prices would be higher in the future, people unloaded their money on what was currently available. Drastic shortages occurred. In that same year, Adolf Hitler made his first attempt to take over Germany. It wasn’t long before he succeeded.
Ron Paul warns us of the lesson to be learned from this story:
Intolerance and extremism always find a readier audience in unfavorable or…chaotic times.
With all manner of bailouts contemplated [in the US] for mortgage lenders and a Federal Reserve committed to ever more money creation, are we so sure that hyperinflation could not occur here? In fact, that outcome becomes more likely every day.
The Revolution: A Manifesto, p. 150-151