It is often argued that to attribute inflation solely to an increase in the volume of money is “oversimplification.” This is true. Many qualifications have to be kept in mind.

For example, the “money supply” must be thought of as including not only the supply of hand-to-hand currency, but the supply of bank credit—especially in the United States, where most payments are made by check.

One of the most stubborn fallacies about inflation is the assumption that it is caused, not by an increase in the quantity of money, but by a “shortage of goods.”

I present in this chapter a chart comparing the increase in the cost of living, in wholesale commodity prices, and in the amount of bank deposits and currency, for the twenty-year period from the end of 1939 to the end of 1959.

As long as we are plagued by false theories of what causes inflation, we will be plagued by false remedies. Those who ascribe inflation primarily to a “shortage of goods,” for example, are fond of saying that “the answer to inflation is production.” But this is at best a half-truth. It is impossible to bring prices down by increasing production if the money supply is being increased even faster.

The cure for inflation, like most cures, consists chiefly in removal of the cause. The cause of inflation is the increase of money and credit. The cure is to stop increasing money and credit. The cure for inflation, in brief, is to stop inflating. It is as simple as that.

Ever since the end of World War II, the public in nearly every country has been told that the gold standard is out-of-date, and what is needed in its place is “monetary management” by the experts. It is interesting to notice what some of the consequences of this have been.

The question whether or not it is desirable to return to a real gold standard, and when, and under what conditions, and at what rate, and by precisely what steps, has become extremely complicated. But an excellent contribution to the subject was made in a speech of W. Randolph Burgess, then chairman of the executive committee of the National City Bank of New York, before the American Bankers Association in November of 1949. I quote in part:

A speech by Allan Sproul, then president of the Federal Reserve Bank of New York, before the American Bankers Association in 1949, was a startling revelation of official doctrine.

In an earlier chapter I declared that inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit.

There is nothing peculiar or particularly original about this statement. It corresponds closely, in fact, with “orthodox” doctrine. It is supported overwhelmingly by theory, experience, and statistics.