The fact that inflation is not necessarily caused by the money supply was proven in the 1970s, and economists did not notice. It was proven again during President Obama’s tenure.
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Milton Friedman is my idol. However, if he said, “Inflation is always a monetary phenomenon,” that is a white lie. Read on to learn why he would have said that.
I graduated in 1973 with my economics degree and began crunching numbers on any problem that I saw. In 1974, the first oil crisis occurred. People awoke in a panic that they needed gas and would be late for work. Many gas stations had only one pump running, and there were lines of cars. People were standing by their cars spewing blame.
I thought, “OK, fellow economists — explain what is causing this.” Not a single economist here or in Europe explained the cause. They were silent in the second crisis as well. So I started a file and began to study the oil crisis and the ensuing inflation.
In 1970, a delivered barrel of oil cost a low of $1.20. By 1980, as a direct result of three enormous tax increases, it cost about $37 per barrel. In 1970, a bulldozer struck a large pipeline in the Saudi peninsula. The pipeline was shut down for about two weeks. The spot market price of oil shot up $6 to about $8 before it went back down. Moammar Gaddafi remembered that, and when a shortage occurred in 1974, he called Armand Hammer of Occidental Petroleum. He told him he was adding a $6 tax to Occidental’s oil. OPEC followed Gaddafi’s lead. When the second crisis occurred in 1978, OPEC added an $8 tax, and oil settled at about $13 per barrel. Milton Friedman complained that this was causing inflation.
Naturally, the media blamed oil companies. Democrat hysteria began to impose a “windfall profits tax.” Milton Frieman became very vocal. He implored Jimmy Carter not to impose the tax, and Carter agreed. The media were in control, and Carter changed his mind. He signed the windfall profits tax legislation. It took effect the next year, in 1980, and oil leaped to $37 in that year. Inflation surged to 14 percent. It had risen almost 10 percent since 1974 due to the rising cost of oil.
Rising oil prices caused the inflation. Friedman knew that. It was obvious. The hysterical hatred of Big Oil was ineradicable from Democrat minds. Friedman had lost that argument, so he switched to a new one. He decided that his only other tool might be for the Fed to slow the economy. However, that is like killing the patient to cure the disease.
The Fed was reluctant. Friedman said all kinds of things to make that happen, even a white lie. I felt he should say anything to stop runaway inflation.
I never dreamed that my fellow economists would lock themselves into the groupthink that the money supply is the cause of inflation. It is not. A woman does not offer $4 for bread when the price is $3 simply because the money supply is large, or because the government spends too much. If there is a shortage of bread, she might offer more.
Inflation is not “too much money chasing too few goods.” Demand-pull inflation can be described as “any amount of money chasing too few goods.” The remainder of inflation is cost push.
Inflation is caused by the increased cost or shortage of usable goods. The main drivers of inflation are taxes and rising oil prices.
We received undeniable economic proof during the Obama years that the money supply and spending do not cause inflation. Our Joint Chiefs had to request spending from Congress each year during five years of the Afghan and Iraq wars. The first year none was requested, then $85 billion, $80, $80, and $80 plus $40 billion for the “surge.” That is $365 billion for both wars over five years.
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President Obama spent over three times that in his first 90 days ($787 billion for the stimulus and $340 billion for the remainder of TARP). He followed that with continuing resolutions of over $800 billion for eight years and $200 billion of additional bank stimulus for three years.
That is the largest increase in spending and money supply in our history, yet inflation did not budge. Inflation averaged 1.75 percent throughout Obama’s terms. And inflation remained low until 2021. It leaped from 1.4 percent to 7.0 percent in 2021, when President Biden cut off every source of oil production within his jurisdiction.
I view economists sitting in the bleachers watching a car roll by. The car is our economy. They describe the acceleration and deceleration with GNP, poverty rate, and other statistics. Then they say, “Do something.” Wouldn’t it be better if economists threw open the hood, found the broken part of our economy, and replaced it?
Our economists are doing a poor job. They can’t even define capitalism. Their vague groupthink is that it is “free markets.” Leftists think, “Yes, free to step on the little guy.” Barter societies in the Middle East are free markets, and they are mired in poverty. How can economists defend capitalism when they don’t know why it increases incomes while reducing prices?
In the past, economists could properly define socialism. Not anymore. They have bought into the red-herring definition that journalists made up in the 1930s: that socialism is government’s takeover of the means of production.
Socialism is what Karl Marx, a journalist, defined it to be: Take from the rich, and give to the poor. Remember? From each according to his ability, to each according to his need.
How do we take from the rich? We tax them. Make no mistake: Taking from the rich to give to the poor, or to anyone else, is an economic system. Marxism, fascism, Leninism, communism, Nazism, and progressivism are monikers that describe different methods to implement the economic system of socialism.
Sorry, economists, but you deserve this invective. Our country is suffering with many economic problems, all of which are solvable, including poverty.
Our economic curricula teach us definitions and how to describe problems, not how to solve them. We need a different curriculum — economic history. Recording and studying economic history are the only ways to understand and solve economic problems.
James T. Moodey is a retired entrepreneur, author, and economic essayist. His recent book, The Ladder Out of Poverty, successfully determined why the poverty rate has not declined since the Great Society promised to end poverty and how to solve the problem of poverty.
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