Inflation

Inflation is a sustained rise in the general price level, which is the same thing as a fall in the purchasing power of money. Conservatives, following the monetarist tradition of Milton Friedman, hold that inflation is caused by the supply of money growing faster than the output of goods and services. It is, in this view, a policy choice rather than an accident or a conspiracy of merchants.

The conservative concern with inflation is moral as much as technical. Inflation transfers wealth silently from savers to debtors, from the prudent to the profligate, and above all from citizens to the government that issues the currency. It is a tax that no legislature votes on.

Key Takeaways

• Conservatives treat inflation as a monetary phenomenon: too much money chasing too few goods.
• Inflation works as a hidden tax, eroding savings and fixed incomes while easing the real burden of government debt.
• Central-bank independence and rules-based monetary policy are favoured over discretionary money creation.
• Sound money, historically gold-anchored, is defended as a check on the political temptation to inflate.
• The poor and the old, who hold cash and fixed incomes, are hit hardest.

History And Context

Debasement of money is ancient: Roman emperors clipped and diluted the denarius to fund their armies, and the resulting price rises helped destabilise the third-century economy. The modern understanding crystallised in the twentieth century. The German hyperinflation of 1923 saw prices double within days; workers were paid twice daily and spent their wages before they collapsed in value, an episode that scarred German monetary policy for a century.

The decisive theoretical contribution came from Milton Friedman and Anna Schwartz, whose 1963 study A Monetary History of the United States argued that changes in the money supply, not animal spirits or cost-push pressures, drive inflation, and that the Federal Reserve’s contraction of money worsened the Great Depression. Friedman’s conclusion, that inflation is always and everywhere a monetary phenomenon, became the core of the monetarist school and informed the disinflation of the early 1980s under Paul Volcker.

Friedrich Hayek extended the argument into political economy: governments inflate because the costs are deferred and diffuse while the benefits are immediate, making inflation the path of least resistance for democracies short of revenue.

The Conservative Position

Conservatives argue that inflation is not bad luck but the predictable result of governments and central banks creating money to finance spending they will not fund through visible taxation. Because the first recipients of new money spend it before prices adjust, inflation quietly redistributes wealth toward those closest to its source and away from ordinary holders of cash.

The remedy is discipline. Friedman favoured a fixed rule for money growth over the discretion of central bankers, on the grounds that discretion invites political abuse. Hayek went further, proposing competition in currencies to strip the state of its monopoly over money. Both shared the conviction that the value of money should not depend on the restraint of officials who face constant pressure to spend.

This is why conservatives have historically favoured a monetary anchor, whether gold or a strict rule. The point is not nostalgia for metal but distrust of unconstrained discretion. A government that can print at will, the argument runs, will eventually print too much, because the short-term incentives all point that way.

Differing Positions

Keynesian and post-Keynesian economists reject the strict monetarist account. They argue that inflation can arise from supply shocks, such as the oil crises of the 1970s, and from cost-push and demand-pull pressures unrelated to the money supply in any mechanical way. On this view, moderate inflation is tolerable and even useful, greasing labour markets and reducing the risk of deflationary spirals, and a central bank should manage demand actively rather than bind itself to a rigid rule. Modern critics add that the link between money growth and prices proved unreliable after 2008, when large central-bank balance-sheet expansion did not produce the inflation monetarists predicted. Conservatives respond that the inflation of the early 2020s vindicated the warning, merely delayed. The timing and mechanism remain contested.

References

1. Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867-1960 (Princeton University Press, 1963), ch. 7.
2. Friedrich A. Hayek, The Constitution of Liberty (University of Chicago Press, 1960), ch. 21.
3. Milton Friedman, Money Mischief: Episodes in Monetary History (Harcourt Brace Jovanovich, 1992), ch. 8.
4. Adam Fergusson, When Money Dies: The Nightmare of the Weimar Collapse (William Kimber, 1975).