INFLAZIONE. – By monetary inflation is meant the increase in the quantity of money in circulation beyond the requirements of the market’s means of payment. Under the gold monetary system, inflation is always preceded by the declaration of forced circulation, by which the convertibility of banknotes into gold is suspended. However, the establishment of forced circulation is not always and necessarily followed by inflation; after the collapse of the gold system, free convertibility into gold ceased to exist for all the world’s currencies, but in very many countries control over the issue of paper money prevented the emergence of inflationary phenomena. In general, the excessive and sustained expansion of the money supply that gives rise to inflation is caused above all by the need of public finance to meet urgent and extensive requirements, as is usually the case with the financing of war and post-war reconstruction, when these needs cannot be met through the normal sources of revenue represented by recourse to loans and tax receipts; in this case the State has no alternative but to induce the issuing bank to create the additional mass of banknotes required for payments by state bodies.
The consequences of inflation are of various kinds: the most immediate and significant is the depreciation of the monetary unit, which corresponds to and is measured by the increase in the prices of goods and services. Indeed, according to the equation of exchange (v. MONETA), the level of prices in a country is directly proportional to the quantity of money in circulation. The velocity of circulation of the means of payment also contributes to determining the price level; during a period of inflation it too tends to increase, thereby intensifying the degree of depreciation of the currency. The effects of the rise in prices, in which every inflationary process is summed up, are of enormous economic and social importance. This importance derives from the fact that not all individual prices, nor even all categories of prices, undergo an increase of equal magnitude. If, in fact, the rise were uniform and occurred simultaneously for all goods, all services, and all personal incomes, there would be nothing more than a simple nominal change in the monetary expression of the various economic quantities, without any negative or positive consequence.
The speed with which, on the one hand, certain prices and certain incomes increase creates broad windfall profits for certain categories of economic agents, while, on the other, the delay with which a certain group of prices and incomes adjusts to the depreciation of the currency results in substantial losses and a lowering of the standard of living for the majority of economic agents. In general, it is the so-called active classes of the population, above all industrialists and merchants, who reap the bulk of the profits arising from inflation; in its more advanced phases, however, gains tend to shift toward the category of speculators, which expands in both numbers and power. The classes that instead bear the negative consequences of inflation are those receiving fixed incomes and wage and salary earners, whose remuneration displays a characteristic short-term stickiness and inadequate adjustment.
Insofar as it benefits the active classes, inflation presents some favorable aspect, since members of these classes, in order to increase their profits, are prompted to expand production. Nevertheless, the negative aspects are overwhelmingly predominant: the differing dynamics of incomes produce drastic transfers of wealth from one category to another, often creating social inequalities; in general, individual savings end by being pulverized, with consequences that can be truly tragic for the mass of small savers; the productive apparatus tends in the long run to disintegrate; in many sectors, especially commerce and banking, phenomena of hypertrophy occur; all the functional relationships of the economic system undergo distortions and displacements that are also reflected in the future. In a word, inflation, when it reaches certain proportions, is one of the most harmful phenomena that a social community can encounter.