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What Causes Inflation?
The most common cause of inflation is too much money chasing too few goods. If everybody had 5 times as much money but the amount of goods and services produced remained the same, prices would naturally rise by a factor of 5. So the answer to avoiding inflation is simply to avoid printing too much money. Easier said than done.Government leaders like to spend a lot of money on military equipment, roads, subsidies, building projects, etc., because this keeps them popular with their constituents. But getting money to pay for these things is often difficult. Raising taxes is as unpopular as government spending is popular. One alternative is to borrow the money, but sooner or later you have to pay it back. Probably the easiest way to pay for those popular government spending programs is to "print" some more money.
As we saw in chapter 10, in most countries the money supplied is controlled by a central bank. In the United States, Japan, Switzerland, and Europe the central banks are independent of government control, and the government cannot force the banks to create more money to pay for its reckless spending. In many Latin American and other developing countries, the government controls the central bank and can force it to cough up new money so it can pay for whatever it wants. The result? In the past these countries have had inflation rates of a hundred to over a thousand percent a year!
Every couple of years, someone in the Congress or the Senate introduces a bill to take the control of the nation's money supply away from the Fed and put it under the control of elected representatives. The argument is that elected officials are accountable to the public, and the public should have some say in something as important as the money supply.
