Defining Inflation.

When at the end of the Middle Ages, at the beginning of the Renaissance, the Spanish fleets began to drop tons of gold on the Spanish markets, the market value of gold went down. Consequently also the market value of gold coins went down.

Because of this development most historians came to the conclusion that during the Renaissance at the end of the 15th century and the beginning of the 16th century Spain became the victim of inflation, because people could buy less with their gold coins.

However, this development has nothing in common with inflation at all. An oversupply of gold in the market did not increase the prices of other products but decreased the market value of gold for a short period of time. The sellers of any other product would become finally richer if they would save the gold.

Real inflation during the Middle Ages developed when some European Kings and their vassals demanded their citizens to exchange their original gold coins for new coins with an alloy of far lower value. They ordered the citizens to exchange their old gold coins for new gold coins. However, those new gold coins had been minted from an alloy with less gold. This allowed the King or his vassal to bring more coins into circulation without increasing the total quantity of gold, but decreasing the quantity of gold per coin.

Of course, the King was stealing from his citizens by using those lower value coins to buy what he needed. Inflation would only begin to develop after that the King had made use of the coins that he had gained as a left-over of his melting proces. Bringing the coins into circulation created inflation. It became in fact a kind of taxation by the King.

Those potentates watered the intrinsic value of the coins down and brought more coins into circulation in a market that did not show any increase in production. One King played the same inflation trick more than fifteen times during his life.

It was this inflation spiral caused by the King's cheating that began to increase the prices. It were not the increased prices that developed inflation but the increased supply of money with a lower value that caused inflation and consequently an increase in prices.

It is the misinterpretation of the real characteristics of inflation that caused more harm to the economy than any other economic development. Therefore we have to define inflation in its absolute only form:

In the United States we can leave the word money away, because the means of payment in the United States consists exclusively of debt that we have conveniently given the name: MONEY.. Every dollar in circulation in the world carries a smaller or larger burden of interest, because the Government of the United States does not bring its own money into circulation. It leaves the creation of money exclusively to bankers.

I remember very well the reactions that I received in 1981 on my statement to Dutch politicians that their country had not been plagued by inflation, but that the price increases in their country had developed because they THOUGHT that those price increases had been caused by inflation. They did not grasp that their reaction on their wrong conclusion created the price increases.

Let me give you a short description of the discoveries that I made in 1981 in the Netherlands about the development of Stagflation, thus the development of a stagnating economy while at the same time the prices began to increase.

The Dutch Mistake