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Pretend with me for a moment, that we were on a pure gold standard and every dollar in your pocket (and bank account) represented a certain weight in gold. Being that the supply of gold is limited to the output of gold mines, the value of your dollars would remain virtually stable, even as the economy grows. As technology continues to increase our productivity, thus driving prices down, your stable dollar would be able to purchase more and more, and your cost of living would steadily decline.

Today however, it is generally accepted that prices rise over time, as well as when economic productivity increases. We refer to these rising prices as inflation, thus demanding cost of living adjustments in our salaries so we can keep up with the increased cost of our daily lives. In our pretend scenario above, prices actually decreased.

In other words, our basic cost of living declined, thus improving our standard of living. We are now so conditioned by inflation however, the very idea of falling prices is hard to grasp. To better understand this, let's first address the myth of deflation.

We're often told that deflation is a bad thing, and that deflation causes recessions and depressions. Yet, in the most prosperous industries of our time, such as computers and flat-screen TVs, prices continuously fall all the time. So obviously, price deflation isn't a bad thing. In fact, declining prices is good, because it improves all of our lives. So what about inflation?

As the famous Noble Prize winning economist Milton Friedman said, "inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." The unavoidable consequence of increasing the money supply faster than in output of goods and services, is a general rise in the prices of those goods and services. In other words, inflation is an increase in the money supply, while the rising prices are its result.

So who or what causes inflation? Don't greedy business men and oil sheiks cause inflation by increasing their profits? No. The Federal Reserve causes inflation. Think of it this way ... If you or I increased the money supply, we'd be thrown in jail for counterfeiting! The Federal Reserve, however, is the only entity that can legally increase the supply of money. How do they do this? By simply turning on the printing press! In other words, by counterfeiting.

Let's play pretend again. Let's say a few of us got together to play a game of Monopoly that contains $15,140 in total money. During our game and unbeknown to you, let's say I sneak $5,000 of additional Monopoly money out of my pocket that I counterfeited at Kinko's. At first, I'd have a tremendous advantage over all of the other players, because I could bid property prices up more than anyone else. But once my additional $5,000 has circulated through the game, we'll all be paying higher prices for our properties. Why? Because we now have $20,140 in circulation, yet there are still only the same amount of properties available to buy.

The above example may be simplistic, but it describes accurately what inflation is and how it works. When the Federal Reserve counterfeits money, it works the same way as our Monopoly game. The first people to get the money are the counterfeiters - the Federal Reserve and Congress - who use the money to "bailout" banks, spend on "pork-barrel" projects, and spend on war.

The next people to get the money in our example are the banks, the people selling Congress their "pork-barrel" projects, and the weapons manufacturers. This process continues on and on ... trickling through the economy from one pocket to another, while we slowly see the prices on the goods and services we need go up.

The most destructive result of this process, is that it redistributes wealth from the poor to the rich. As Congress and the Federal Reserve use the newly printed money to purchase goods and services for their needs, they bid up prices by artificially increasing demand. But as prices rise due to the introduction of this new money, the people on fixed-incomes and the poor whose wages didn't increase, are unable to buy as much with their incomes as they did before. Thus, the Federal Reserve's newly printed money, results in a tax on the poorest among us.

As the pro-inflation economist Lord Maynard Keynes wrote in his book, The Economic Consequences of the Peace:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens ... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

We throw counterfeiters in jail for good reason. And for that same reason, we should End the Fed!

Learn more about this author, Michael Todd.
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