INFLATION. — By monetary inflation is meant the increase in the quantity of money in circulation beyond what is required by the market’s need for means of payment. Under the gold monetary system inflation is always preceded by the declaration of forced circulation, which suspends the convertibility of banknotes into gold. However, the establishment of forced circulation does not necessarily or always lead to inflation; after the collapse of the gold standard, free convertibility into gold has been lacking for all the world’s currencies, yet in many countries the control of paper money issuance has prevented the emergence of inflationary phenomena. In general, the excessive and continuous expansion of the money supply that gives rise to inflation is provoked chiefly by the necessity of public finance in meeting inescapable and large-scale needs, such as the financing of war and post-war reconstruction, when these needs cannot be met through normal revenue sources like borrowing and tax revenue; in such cases the State has no recourse but to press the issuing bank to create the additional mass of notes required for payments by state entities.
The consequences of inflation are manifold. The most immediate and significant is the depreciation of the monetary unit, which corresponds to and is measured by the rise in the prices of goods and services. Indeed, according to the equation of exchange (v. MONEY), the level of prices in a country is directly proportional to the quantity of money in circulation. The velocity of circulation of means of payment also contributes to determining the price level, and this velocity tends to increase during a period of inflation, thereby accentuating the degree of monetary depreciation. The effects of rising prices, which encapsulate every inflationary process, are of enormous economic and social importance. This importance derives from the fact that not all individual prices, nor all categories of prices, rise by the same amount. If, indeed, the rise were uniform and developed simultaneously for all goods, services, and personal incomes, there would be nothing more than a simple nominal change in the monetary expression of different economic magnitudes, without any negative or positive consequences.
The speed with which, on the one hand, certain prices and certain incomes rise creates substantial windfall profits for some economic groups, while, on the other, the delay with which a certain group of prices and incomes adjusts to monetary depreciation results in heavy losses and a lowering of living standards for most economic subjects. In general, it is the so-called active classes of the population—especially industrialists and merchants—who reap the bulk of the profits deriving from inflation; in its more advanced phases, however, the gains tend to shift toward the category of speculators, whose numbers and power grow. The classes that bear the brunt of the negative consequences of inflation are those of fixed-income earners, wage- and salary-earners, whose remuneration exhibits a typical sluggishness in making prompt and adequate adjustments.
To the extent that inflation resolves to the advantage of the active classes, it presents some favourable aspects, since members of these classes, in order to increase their earnings, are inclined to expand production. The negative aspects, however, are far more predominant: the differing dynamics of incomes provoke drastic shifts of wealth from one group to another, often creating social upheavals; in general, individual savings are eroded, with consequences that can be truly tragic for the mass of small savers; the productive apparatus tends toward disintegration in the long run; in many sectors, especially commerce and banking, phenomena of hypertrophy occur; all the functional relationships of the economic system suffer distortions and shifts that also affect the future. In a word, inflation, when it reaches certain proportions, is one of the most prejudicial phenomena to which a social collectivity can be exposed.