(This item originally appeared at Forbes.com on November 11, 2026.)
Recently, we looked at the varieties of “non-monetary inflation,” as we called it in our 2022 book, Inflation: What It Is, Why It’s Bad, and How To Fix It. Basically, prices rise due to some kind of supply and demand factor, with the assumption that the value of the currency is stable. In economics, this is the domain of the Keynesians, who have a lot of silly pseudo-math, which do not anywhere include any place to put changes in currency value.
This was largely the result of postwar Keynesianism, which became academic dogma during the 1940s and 1950s. John Maynard Keynes himself, who was quite sophisticated about monetary affairs, would never make such simple errors. But, Keynes died in 1946, leaving his legacy to be continued by lesser minds. They developed their doctrines in the context of the Bretton Woods system, where the dollar’s value was pegged to gold at 889 milligrams of gold per dollar (or $35/oz., as they termed it in those days). So, the assumption inherent in postwar Keynesianism, that currency values were stable, really was the reality of the time. But, not any longer.
This big deficiency in academic Keynesianism left a role to play for Monetarism, which also arose during the 1950s, although it has been around in some form basically forever. Milton Friedman, the leader of the postwar Monetarists, declared in 1963 that “inflation is always and everywhere a monetary phenomenon.” I personally like this sort of precise – more precise – definition of the word “inflation,” which is usually used rather vaguely by people who think vaguely. Ludwig von Mises, writing in the 1940s, also preferred to use the term “inflation” to refer to monetary phenomenon specifically. But, since nobody since then has followed Mises’ and Friedman’s encouragement to use words more precisely, we adopted the term “monetary inflation” to refer to specifically to monetary effects, which don’t really have anything to do with supply and demand for goods and services.
The problem with this is: how can you tell if you have “monetary” or “non-monetary inflation”? Or, both together, in some confusing mix – which is the norm in real life? Earlier, we used the example of Japan during the high-growth 1950s and 1960s. During those two decades, the official CPI rose an average of about 4.8% per year compounded, rising a total of 155%. According to the CPI, there certainly wasn’t any “price stability.” A lot of prices went up, although prices for a lot of other things (especially manufactured goods) went down.
Now, let’s look from a monetary perspective. During those two decades, “M2”, a statistic favord by Monetarists, had a compound annual growth rate of about 19% per year. Base money, or basically the balance sheet of the Bank of Japan including banknotes in circulation and bank reserves, rose about 15% CAGR.
Those are big numbers. During the terribly inflationary 1970s, the CAGR of M2 in the US was 9.8%; and base money was 7.3%.
During the 1950s and 1960s, the Japanese yen was pegged to the dollar at 360 yen per dollar; and the dollar was pegged to gold at 889mg. This meant that the yen was effectively pegged to gold at 889/360, or 2.47mg. The currency didn’t lose value; and all the increases in the CPI during that time, or “non-monetary inflation,” were basically due to high growth. Nor did anyone complain about “inflation” in Japan during those decades, as they did soon after, in the 1970s. It wasn’t a problem.
The US dollar left its gold peg in a series of steps, culminating in a big break in 1971. Then, the dollar’s value crashed vs. gold, its old benchmark, which had served for many centuries as a reliable real-world proxy for stable monetary value. By the 1980s, the dollar was worth only about 89mg of gold, 10% of its prior value – reliable evidence that the value of the dollar fell by roughly the same amount.
This was the terrible inflationary disaster of the 1970s. The values of currencies fell by about 90%; and prices rose as a consequence. Everyone everywhere complained. However, you couldn’t see it in terms of “money supply.” During the 1960s, the CAGR for M2 was 7.2% and base money was 5.0%; during the disinflationary 1980s, it was 7.4% and 6.8%. These were a little lower numbers than during the 1970s, but not much lower, and hardly more than statistical noise. This is why economists during the 1970s were puzzled. There was no “increase in the money supply” of significance. They defaulted then to their Keynesian supply/demand models, and concluded that the world was “running out of everything,” especially oil.
Keynesianism failed. Monetarism failed. And, economists (a decidedly untalentedbunch) haven’t bothered to fix their failed theories since then, over a period of more than forty years. They just repeat that same old nonsense they learned from textbooks. That’s why we had to write a book about inflation.
Fortunately, it’s not complicated. It’s simple. Today, we have floating fiat currencies. These go up and down in value – in the longer term, mostly down. There is a persistent depreciation trend. When a currency declines in value, prices tend to rise to compensate. A 50% decline in currency value might lead to a doubling of prices, theoretically, over a period of price adjustment stretching years; but, in reality, it is not so precisely mathematical as that.
This decline in currency value might be accompanied by some dramatic increase in “money supply,” or it might not. In real history, there is surprisingly little relationship. As we saw in the 1970s, not much was going on in terms of “money supply,” but currency values (not just the dollar but all major currencies) were crashing. “Monetary inflation” was the predictable result. It really is that simple.
Now let me ask you: The Federal Reserve might raise or lower its interest rate targets, reacting to unemployment figures, the stock market, or some other combination of dozens of economic statistics. What does this have to do with the value of the currency? Not much of anything at all. And so we continue to drift on a sea of ignorance, as fiat currencies continue their long-term depreciation trend.
