Will Higher Interest Rates Counter Inflation? – OpEd |
There is almost complete unanimity among economists and various commentators that inflation is about general increases in the prices of goods and services. It is also held that to counter general increases in prices, as depicted by the consumer price index the CPI, the central bank should raise interest rates. A tighter interest rate stance by the central bank will “cool off” the demand for goods and services. This, in turn, is likely to weaken the growth rate of the consumer price index (CPI).
In order to counter “inflation,” there is the need to ascertain an accurate and precise definition of inflation. In reality, inflation is the act of the diversion of wealth by means of an artificial expansion of the money supply. Historically, inflation originated when a country’s ruler would force his citizens to give him all of their gold coins under the pretext that a new gold coin was going to replace the old one. In the process, the king would falsify the content of the gold coins by mixing it with some other metal and return diluted gold coins to the citizens. On this, Rothbard wrote,
More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks,” but of a lighter weight. The leftover ounces of gold or silver were pocketed by the king and used to pay his expenses.
More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks,” but of a lighter weight. The leftover ounces of gold or silver were pocketed by the king and used to pay his expenses.
Because of the dilution of the gold coins, the ruler could now mint a greater number of coins and pocket for his own use the extra coins minted. What was now passing as a pure gold coin was in fact a gold alloy coin. The increase in the number of coins brought about by this debasement of gold coins is what inflation is all about (i.e., the increase in the number of coins).
If we were to accept that inflation is an increase in the money supply, then we are likely to reach the conclusion that inflation results in the diversion of wealth from wealth-generators towards the holders of newly-printed, coined, or........