Consumer price increases are not inflation itself; they are a symptom of inflation. Similarly, a fever is not the infection; it is a symptom of the infection. Milton Friedman clearly stated this fact when he said:
Inflation is always and everywhere a monetary phenomenon.
What he meant by this statement is that debasement of currency requires more money to exchange hands for every given transaction. In our current situation the Federal Reserve Bank has created so much money out of thin air that the purchasing power of the dollar is collapsing. This requires us to spend more dollars on our purchases.
Rising costs can and do cause price increases for individual goods and services, but rising costs cannot cause an increase in the general price level. When the price of a good or service increases consumers will substitute another good or service in its place. A general increase in prices across a wide band of goods and services can only be caused by an increase in the money supply.
With price controls becoming trendy again, I've included links to 11 articles on the topic in the post below. Each link is followed by a brief highlight from the associated article. I am sure that you will find something in the list below to impress your friends at the next cocktail party.
A 4,000 year history of economic calamity
There is a four-thousand-year historical record of economic catastrophe after catastrophe caused by price controls. This record is partly documented in an excellent book entitled Forty Centuries of Wage and Price Controls by Robert Schuettinger and Eamon Butler, first published in 1979.
In Babylon some 4,000 years ago the Code of Hammurabi was a maze of price control regulations. Such laws “smothered economic progress in the empire for many centuries,” as the historical record describes. Once these laws were laid down “there was a remarkable change in the fortunes of the people.”
The Continental Congress wisely adopted an anti-price-control resolution on June 4, 1778 that read: “Whereas it hath been found by experience that limitations upon the prices of commodities are not only ineffectual for the purpose proposed, but likewise productive of very evil consequences--resolved, that it be recommended to the several states to repeal or suspend all laws limiting, regulating or restraining the Price of any Article.”
At the end of World War II American central planners were even more totalitarian when it came to economic policy than were the former Nazis. During the post-war occupation of Germany, American “planners” rather liked the Nazi economic controls, including price controls, that were in fact preventing economic recovery. The notorious Nazi Hermann Goering even lectured the American war correspondent Henry Taylor about it! As recounted by Schuettinger and Butler, Goering said:
Your America is doing many things in the economic field which we found out caused us so much trouble. You are trying to control peoples’ wages and prices — peoples’ work. If you do that you must control peoples’ lives. And no country can do that part way. I tried and it failed. Nor can any country do it all the way either. I tried that too and it failed. You are no better planners than we. I should think your economists would read what happened here.
In 301 AD, Roman emperor Diocletian implemented price ceilings on over 1,200 goods. The silver coinage had been debased over the past 250 years, and the citizens were understandably unhappy about high prices.
The English translation of Diocletian’s edict is fun to read. It shows that not much has changed in politics over the millennia. Diocletian is introduced as “dutiful, blessed, unconquered” and the empire’s military victories are acknowledged as having produced a wonderful peace. But, the emperor is obliged to “secure the quiet we have established with the reinforcements Justice deserves.” The barbarian tribes had been vanquished, the Samaritans, Persians, and Britons had been conquered, but now a new war must be waged against greed: “Greed raves and burns and sets no limit on itself.” Greedy businessmen were exploiting the poor with high prices and “It is appropriate to the forethought of us who are the parents of the human race, that justice intervene in matters as a judge.”
Lactantius, a philosopher, wrote about the effects of Diocletian’s edict a few years later:
While Diocletian, that author of ill, and deviser of misery, was ruining all things, he could not withhold his insults, not even against God. This man, by avarice partly, and partly by timid counsels, overturned the Roman empire.
He also, when by various extortions he had made all things exceedingly dear, attempted by an ordinance to limit their prices. Then much blood was shed for the veriest trifles; men were afraid to expose aught to sale, and the scarcity became more excessive and grievous than ever, until, in the end, the ordinance, after having proved destructive to multitudes, was from mere necessity abrogated.
In the 1970s, thanks to years of big-time federal spending on wars and welfare programs, the US abandoned its gold obligations under the Bretton Woods system, and Nixon closed the gold window. Knowing that this would cause prices to rapidly rise, the Nixon administration also implemented a number of wage and price controls as part of a “temporary” 90-day freeze on wages, prices, and rents. These were the first peacetime price controls in US history. As you might guess, however, price controls did not end after 90 days. Only the “freeze” lasted 90 days. After that, prices would be governed by a “Price Commission” and “Pay Board” that would only slowly abolish price controls—but not until after the 1972 election, of course.
By early 1973, many producers had endured price controls for 18 months. US Senate report then concluded that price controls had caused a breakdown in energy production and distribution. Fuel shortages were “far more extensive than anticipated.”
A freeze on prices meant it was no longer profitable for many producers to bring products to markets. The supply of goods and services fell while prices rose.
For those who bother, however, to learn about economics and economic history is to understand how the regime is ripping us off. Without this knowledge—and without some understanding of the benefits of private property and free markets—it’s easy for politicians to simply assert that their latest tax or regulation will make everyone better off. Trump does it when he calls for higher taxes in the form of tariffs. A lot of people believe it. Harris is now doing the same thing with price controls. Many will believe her and happily support the latest government policy that will further crush them under a rising cost of living.
Democrat presidential candidate Kamala Harris is demonstrating why monetary debasement has always been a favorite way for government officials to plunder the citizenry. Rather than focusing on the Federal Reserve as the root cause of prices rising across society, she’s blaming rising food prices on grocery-store owners. Consequently, she says that if she is elected president, she’ll get a federal “anti-gouging” law enacted that prevents grocery stores from raising prices.
In other words, she’s going to impose price controls, which inevitably means that we are going to have to deal with shortages of everything in grocery stores that has a price control imposed on it.
Let’s assume that the government is spending $2 trillion more per year than what it is bringing in with taxes. Let’s also assume that the government is already $34 trillion in debt.
Where does the government get that $2 trillion? One way is to raise taxes. Another way is to borrow it and add it on to the overall federal debt. But people get angry when taxes get too high. They also get concerned when they see the government’s debt getting excessively high because they know that ultimately taxpayers are on the hook for paying it off.
Thus, the government has to figure out a way to tax people without their realizing that they are getting taxed. That’s where a central bank (i.e., the Federal Reserve) and the printing press come into play. The central bank simply prints up that $2 trillion and the government goes out and spends it.
But that $2 trillion in new paper money has consequences. It lowers the value of everyone’s money. And there is only one way that that lower value can be reflected: through higher prices of most everything in society. In other words, people’s money simply doesn’t buy as much as it did before the government’s monetary debasement. Let’s say it buys 20 percent less than it did before. That’s the same as if the government had taxed people an additional 20 percent of their income.
Except that there is a big difference between raising income taxes by 20 percent and a 20 percent monetary-debasement tax. The difference is that people can see the 20 percent increase in taxes but many of them can’t see that the government is behind the 20 percent debasement tax. Instead, they see the rising prices in the grocery store and blame it on the grocery-store owners rather than on the Federal Reserve, which has lowered the value of their money through monetary debasement.
Price Controls Are The ‘Hail Mary’ Play of a Bankrupt System
All the usual tricks which got us this far, money printing, interest rate suppression, ballooning debt have finally run out of runway because they are now resulting in consumer price inflation.
This is 100% the fault of bad political leadership and central bank policy but that will never be admitted…Instead, politicians will resort ad hominem attacks on the productive class, and absurd accusations that it is the fault of investors and entrepreneurs, who must navigate the risks of monetary debasement, for causing it.
After one looks at the historical record – 4,000 years of endless failures, in price controls, communism and every permutation of centrally planned economies, there has to be a reason politicians are still reaching for it as a solution to problems they have caused and why a small – but vocal and influential, segment of the public cheerleads this as a net benefit for society.
The secret sauce of “it’s different this time” is technology – particularly Big Tech, big platforms, Total Information Awareness and surveillance. Central planners think it is now technically feasible to run all the calculations and tracking in real time that would enable unrestrained monetary stimulus while keeping a lid on negative externalities like inflation.
The stage is set, when politicians tell you they want to be able to control prices, believe them – but what the public must understand is that price controls means spending controls.
The politicians will tell you that it’s all about putting “greedy CEOs” in their place.
What they won’t tell you is that price controls also means is telling you what you can or cannot eat, how you use energy – whether you’ll be permitted to travel, or make any other kind of economic decision or make any kind of value exchange that you used to take for granted.
Throughout history, price controls have always brought about serfdom and tyranny because that is the only way to override individual incentives. In today’s highly wired world that would mean total technocratic feudalism.
The most vivid example we have today is Venezuela – where price controls were so effective, the rabble had to break into public zoos to eat the animals.
Why price controls should stay in history books
Note that this article is written by Christopher J. Neely, an economist and senior economic policy advisor at the St. Louis Federal Reserve Bank and is published on the St. Louis Federal Reserve Bank website.
- As inflation rises, some have called on the government to impose price controls. But such controls have significant costs that increase with their duration and breadth.
- Prices allocate scarce resources. Price controls distort those signals, leading to the inefficient allocation of goods and services.
- Appropriate fiscal and monetary policies can reduce inflation without the costs imposed by price controls.
Let’s consider the impact of price ceilings. High prices have two economic functions:
1. They allocate scarce goods and services to buyers who are most willing and able to pay for them.
2. They signal that a good is valued and that producers can profit by increasing the quantity supplied.
That is, prices allocate scarce resources on both the consumption and production sides. Price controls distort those signals.
Nail in the coffin
"We're dealing with a lot. The net profit in grocery stores is about one and a half percent — if you're doing really good, one and three quarters. Just in layman's terms, it's about a $1.50 for every $100 that you go through the registers. And what we've seen in the last three to four years has been pretty horrific," Rep. Michael Rulli, R-Ohio, told Fox News Digital in an exclusive interview.
"This will be a nail in the coffin of this industry that no one can imagine."
He pointed to the bar code, known as the stock keeping unit (SKU), denoting the individual product and said his stores, for example, carry items with 38,000 different bar codes, whereas larger grocery chains carry more.
"What will happen in four years of a Harris administration is those 38,000 SKUs will go all the way down to 5,000 SKUs, and you will be living in Cuba or Venezuela."
To accommodate the federal government’s irresponsible spending, the Federal Reserve has ballooned the money supply from $4.7 trillion at the start of this century to $21 trillion today, an increase of 347%! Over the same period, U.S. GDP has risen 108%. As money in circulation increases faster than the production of goods and services does, the price level must rise. In other words, the dollar’s value relative to goods and services it can buy continues to decrease.
To make matters worse, the Federal Reserve has been buying debt issued by the federal government, allowing the latter to continue its out-of-control spending habit. The Federal Reserve has expanded its balance sheet to over $7 trillion and is now by far the largest holder of U.S. federal debt.
Incidentally, “inflation” as an economic term originally meant the creation of new money and credit, not rising prices. Those wishing to confuse the public on which is the cause and which the effect has gradually redefined inflation as rising prices. Check any hard copy Merriam-Webster dictionary printed in the 20th century and see for yourself.
Only the Federal Reserve can cause a general rise in prices and only when it creates new US dollars that didn’t previously exist (inflation).
New dollars can only be created permanently by the Federal Reserve. The reason prices have steadily risen over the past 111 years is because the Fed has constantly increased the supply of dollars over that period.
The reason prices rose so much more over the past four years than they had previously is the Federal Reserve created far more dollars in the past four years than it has on average during the past century.
Probably no argument for the cause of higher prices is more absurd than “corporate greed.” Politicians resort to this argument to deflect blame. But no matter how greedy corporations are or become, they have no power to increase general price levels.
First, every corporation always seeks maximum profit. If this is greed, then corporations are always greedy. There would be no reason for them to suddenly become greedier just at the moment when consumer prices are rising. On the contrary, corporations generally compete by trying to lower their prices to undercut competitors.
But even if corporations did suddenly all decide at once, through coincidence or collusion, to raise their prices at the same time, this could not cause prices in general to rise. It would merely force consumers to make different decisions on what they purchase and what they do not. Consumers would pay the higher prices for those products most important to them, then the next important, and so on until they ran out of money. They would forgo those items lower on their value scales they could no longer afford, putting downward pressure on the prices of those products.
There are many other non-monetary arguments made for what is commonly called “inflation,” but they all fail for the same reasons as those analyzed here. There is no way to increase the price of one product without a corresponding fall in the demand for others unless new dollars are added to the economy. It’s the Fed, stupid.
Rising grocery costs continue to put the squeeze on families. Overall, the cost of a trip to fill the pantry rose nearly 22 percent since the beginning of 2021. Many specific staples rose far more — eggs are up 110 percent, flour up 29 percent, orange juice up 82 percent. A family of four spending $1000 per month just three and a half years is spending an additional $2,640 annually for this same shopping list.
Unfortunately, Vice President Harris misdiagnosed the source of the problem as “bad actors” seeing their “highest profits in two decades.” She blames the initial surge in food prices on supply chain issues during the pandemic — certainly a major contribution to the shortages and price increases on many items early in the pandemic.
However, Harris mixes this truth with falsehood by claiming businesses are now pocketing the savings after these supply-chain issues have subsided. Her proposed solution — “the first-ever federal ban on price gouging on food” — will compound the misery.
The flood of new money coursed through the economy. The M2 money supply swelled by 40 percent in just two years. More dollars chasing goods and services ultimately resulted in dramatic price hikes.
Another point the Biden White House misses is that profits were higher in nominal terms because of inflation. The number of dollars was higher than the previous year, but those dollars were worth less than before.
So, when you take a normal 3-8% profit margin and multiply it by the 13% inflated dollars, you end up with a staggering number, which Kamala and Joe claim was price gouging. In reality, it wasn’t price gouging—it was just the normal effects of inflation.
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