Crash Course Chapter 10: Inflation


We’ve got one more Key Concept to share before we launch into current economic conditions, and it concerns inflation.

Most of us think of inflation as rising prices, but that’s not quite right. Imagine if an apple and an orange are a dollar each one year, but ten dollars each next year. Since you enjoy eating apples and oranges the same in one year as the next, then the only thing that’s truly changed here is your money, which has declined in value.

Inflation is not caused by rising prices. Rising prices are a symptom of inflation. Inflation is caused by the presence of too much money in relation to goods and services. What we experience are things going up in price, but in fact, inflation is really the value of your money going down simply because there’s too much of it around.

Here’s an example: Suppose you are on a life raft and somebody on board has an orange that they are willing to sell for money. Only one person in the raft has any money, and that’s a single dollar. So the orange sells for a dollar. But wait! Just before it sells you find a ten dollar bill in your pocket. Now how much do you suppose the orange sells for? That’s right, ten bucks. It’s still the same orange right? Nothing about the utility or desirability of the orange has changed from one minute to the next, only the amount of money kicking around in the boat. So we can make this claim: Inflation is, everywhere and always, a monetary phenomenon.

And what’s true within a tiny life raft is equally true across an entire nation. Here, let me illustrate this point using a long sweep of US history.

What we’re looking at here is a graph of price levels in the United States that begins on the left in 1665 and progresses more than 300 years to 2008 on the right. But at this moment, only inflation over the period from 1665 to 1776 is marked on the chart. On the “Y” axis, what is being charted are price levels, *not* the rate of inflation. Now, you might ask, “How can we compare prices in 1665 to prices in 1776, let alone 2008? Life was so different between those periods.” While there are some obvious liberties that have to be taken here, what is being compared are the basics of life. People ate food in 1665 as they did in 1776. People had to transport themselves, get educated, and live in houses in 1665 as they did in 1776. So what is being compared is relative cost of living in one period to the next. That is, inflation.

In 1665, the basic cost of living was set to a value of “5”. What is most striking about this chart to me is that from 1665 to 1776 there was absolutely no inflation. For 111 years, a dollar saved was, well, a dollar saved. Can you imagine what it would be like to live in a world where you could earn a thousand dollars, put it in a coffee can in the backyard, and your great- great grandchildren could dig it up and enjoy the same benefits from that thousand dollars as you would have 111 years previously?

This isn’t a fantasy in a cheap novella, this was reality in our country at one time. The country was on a silver and gold standard during this period and advanced tremendously while enjoying near-perfect price stability during times of peace. However, along came a war, the Revolutionary War, and the country found itself unable to pay for the war with the gold and silver to be found in the Treasury.















At any rate, back to our main story. Here’s inflation between 1665 and 1975. Knowing what you now know about Nixon’s actions on August 15th 1971, what do you suppose the rest of the graph looks like between 1975 and today?

This is your world. You’ve been living on the steeply rising portion of the graph for so long that that you think it’s level ground.

Because inflation is now a permanent feature, and because it advances at a percentage rate, your money is declining in value exponentially.

That’s what this “hockey stick” graph is telling you.

What does it mean to live in a world where your money loses value exponentially? You know what it means, because you live there. It means always having to work harder and harder just to stay in place, and it means perplexing and astoundingly risky investment decisions have to be made in an attempt to grow ones savings fast enough to avoid the ravages of inflation.

It means two incomes are needed where one used to suffice, and kids left at home while both parents work. A world of constantly eroding money is a devilishly complicated world to navigate and leaves scant room for error, especially for those without the appropriate means or connections.

And it doesn’t have to be this way. And indeed, for the majority of our country’s history it wasn’t. And I’m hard pressed to say that inflation is a necessity and serves some essential and greater good, because a lot of progress and advancement happened between 1665 and 1940 without the “benefit” of perpetual inflation.

The point of this section was to help you appreciate the fact that our country has not always lived under a regime of perpetual inflation, and that, historically speaking, it’s a rather recent development.

To help put all of this in context, let’s mark the moments when our country abandoned the gold standard, first internally and then completely.

It may have surprised some of you, as it did me, to find out that inflation is not a mysterious law of nature, like gravity, but rather an extremely well-characterized matter of policy.

So now we have our fifth Key Concept: Inflation is, everywhere and always, a monetary phenomenon.


Here’s what one wag had to say about this matter: “Paper money always returns to its intrinsic value – zero." Of course, he was a bit too pessimistic in his assessment, as this German woman proves by using her furnace to liberate the intrinsic heat content of paper money.

John Maynard Keynes, the father of the branch of economics that utterly dominates our lives, had this to say about inflation:

Lenin was certainly right, there is no more positive, or subtle or surer means of destroying the existing basis of society than to debauch the currency.



Given that the destructive, corrosive effects of inflation are so well understood by the architects and administrators of our monetary system, it’s fair to wonder exactly what the plan here is.

Now, finally, here in Chapter Ten of the Crash Course, we can string together these three important dots:

#1: In 1971, the US, and by extension the world, terminated the last connection to a gold restraint and federal borrowing “turned the corner,” never to look back.

#2: Concurrently, the money supply “turned the corner” and started piling up at a rate much faster than goods and services were growing.

And so we get to data point #3, which is that inflation is the fully predictable outcome of data points #1 and #2.

Boom. Boom. Boom. One, two, three. All connected, all saying the same thing, with profound implications for our future.

Now, if you’re of a mind that there’s no reason that all three of these graphs cannot just continue to exponentially accelerate to ever-higher amounts without end, then there’s no point in watching the rest of the Crash Course.

However, if you don’t happen to believe that, then you’re going to want to see the rest of this.

There is literally nothing more important for you to be doing right now than gaining an understanding of how these pieces fit together, assessing the risks for yourself, and taking actions to prepare for the possibility of a future that’s substantially different from today.

Now that we’ve covered compounding, money, and inflation, you have the tools to get the most from the remaining sections of the Crash Course.

We have a few more dots to connect. Let’s go.

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