From: rbp@investor.pgh.pa.us (Bob Peirce #305)
Newsgroups: misc.invest
Subject: Re: Inflation - definitions (was: Stock market "Correction"?)
Date: 13 Apr 92 14:26:18 GMT
Reply-To: rbp@investor.pgh.pa.us (Bob Peirce #305)
Organization: Cookson, Peirce & Co., Pittsburgh, PA

In article <121953@lll-winken.LLNL.GOV> kent@phoenix.ocf.llnl.gov (Kent J Crispin) writes:
>In article <1992Apr3.011958.15593@investor.pgh.pa.us> rbp@investor.pgh.pa.us (Bob Peirce #305) writes:
>
>>More money IS inflation.  
>
>No, increasing prices IS inflation.  If the money supply is increased at a 
>lesser rate than the growth of the economy, then prices would, in theory,
>decrease, but the money supply is still increasing.

Which is still inflation.  The effect on prices is only that, an effect.
Calling increasing prices inflation is a relatively recent phenomenon. 
I don't know the reason but I can think of two.  First, it is easier for
the public to grasp the effect than the cause.  Second, Keynes
recommended inflation as a way to pull the world out of its depression. 
However, since this followed the deflations of the early 30s and was not
likely immediately to lead to rising prices it was useful to redefine
inflation as rising prices to obscure what was really being done.  The
printing presses were running full blast all over the world, but, see,
no "inflation!"  The rising prices came later.
>
>>You absolutely cannot have a sustained,
>>general increase in the level of prices without printing money.  Note the
>>operative words - sustained & general.
>
>It would be possible if the economy was shrinking and the money supply remained
>constant.  Of course, you can't shrink past 0, so it might not sustain forever
>:-)

I'll give you that.  I forgot the obligatory, ceteris paribus.  Sorry. 
However, in a relatively free, capitalistic economy, a long term
depression as you describe is not likely.  It has happened twice in our
country and both times it was associated with deflation. 

First, after the Civil War, somebody decided we should return to a gold
standard at the price which existed prior to the war.  However, because
of the war-time inflation, the dollar was trading well below that price.
Therefore, the money supply was reduced until the price of the dollar
returned to the pre-war price in terms of gold.  During this period,
which was spread over many years, production expanded but prices and
wages fell.  The standard of living improved but it probably was not
terribly obvious at the time!

Second, in the 30s, the Fed reduced the money supply by about 25-35%.  I
forget the exact amount.  This was done very quickly so instead of the
situation from about 1865 to the 1890s you had it all in a few years.
At the same time the growth of labor unions made the price of labor
rather sticky and while prices fell, costs did not fall as quickly.  It
took a much longer time to work out of this and the standard of living
declined.

Keynes argued, I am forced to say correctly, that since wages were being
kept from falling, the only solution was to inflate, thereby reducing
the buying power of what was being paid.  However, for this to work,
labor could not be allowed to understand what was being done to it. 
Hence, let's start calling inflation a rise in prices.  The ownership of
gold also was outlawed.

Prior to the 30s, all educated individuals understood that inflation
applied only to the production of money.  When the printing presses ran
they fled to gold.  This option was eliminated.  Further, since labor at
that time was generally not well educated, it was possible to cover up
what was happening to them.  It is unfortunate that this approach worked
so well it continues in use to this day, and labor still is being deceived.
-- 
Bob Peirce, Pittsburgh, PA         rbp@investor.pgh.pa.us         412-471-5320
venetia@investor.pgh.pa.us [NeXT Mail]  !uunet.uu.net!pitt!investor!rbp [UUCP]