|Graph #3: The Monetary Base relative to Actual-Price Output|
Graph #3 shows a remarkable decline in the quantity of money from the end of World War II until about 1981. Then a persistent, gradual increase lasting until just after the year 2000. Then a brief decline, followed by the Bernanke spike. That spike, however, does not this time appear to increase the quantity of money to a dangerous and unprecedented level. It only restores the quantity of money to the level it was starting from, at the end of World War II.
We came out of World War II with too much money. The evidence is not in the graph above, but rather in the wartime and post-war inflation we experienced.
A combination of rising prices and anti-inflation policy helped reduce the quantity of money relative to Actual-Price Output.
By 1960 inflation was almost non-existent. Soon, however, it started coming back.
In my view, after 1960 the quantity of money was insufficient. In my view, after 1960 the increasing use of credit was more and more responsible for inflation.
But policymakers continued to reduce the quantity of money until 1981. By that time, we didn't have enough money to have a vibrant economy. And by that time, the cost of credit-use was the major force behind inflation.
So the Sunday graph, at the top of this page... The quantity of money is back up where it was at the end of World War II. At that time, it was enough to cause inflation. So it is probably enough to cause inflation now. But there is more to the story.
Back at the end of WWII we had financial technology that could turn a dollar of base-money into 12 dollars of debt.
Today we have the financial technology that can turn a dollar of base-money into $60 of debt. Five times as much. So there is the chance that inflation can be five times worse now, as compared to the inflation we had in the years after World War II.
To prevent it, we need economic policies that encourage accelerated repayment of debt and policies that limit our exploitation of the financial technology.