A must read to understand what is causing inflation.

Published in the 90s, Money Mischief dives into various monetary gyration episodes in history to illustrate the crucial role that central banks & politicians & their (mis)management play in causing inflation or deflation, the health of economies, and the financial health of citizens.

Since we've been currently going through the largest spike in inflation in my generation's history, I wanted to go through this book to see what Friedman might have thought about today's inflationary disease that's been spreading.

Here's some points I took away from the book that links the past to current inflationary issues:

Trust & the the Island of Stone Money:
Friedman starts with the story of the Yap islanders who used large limestone wheels (rai stones) as money. The islanders would move the stones to each other's properties as a form of payment. Even when one of the stones was lost at sea during transport, it was still acknowledged as being 'in circulation.'

This serves as a metaphor for the concept of trust in modern fiat currencies, which are not backed by gold anymore, and are mostly faith-based.

Fiat vs Silver and Gold backing:
Friedman described the bimetallism debate in the U.S., which was a period in monetary history where fierce lobbying & debate was happening around whether or not silver, gold or a mixture of both, should be money or back the dollar.

The importance here is understanding the consequences of pegging a currency's value to a commodity whose value can fluctuate based on global supply and demand.

The comparison today could be the fact that the US Dollar is the global reserve currency of the world, and many other countries are de facto "backing" their economies with USD, or taking on USD debt.

When the central bank raises interest rates & when the US inflates the supply of money, this puts enormous pressure on these countries, driving crushing inflationary forces globally, even faster than in the United States.

Central Bankers cause boom/bust cycles & make Depressions worse:
Friedman criticized the Federal Reserve's role in exacerbating the Great Depression, mainly by allowing a severe contraction in the money supply. This is a reminder of how mismanagement of money supply can have catastrophic consequences.

Recently, through 2021-2023, after record money printing, we've also seen one of the largest contractions in the money supply in US history. The result of this massive contraction of the money supply combined with the fastest jacking of interest rates is record losses in stock & bond markets. Many think we are living in a Silent Depression, where half the country is doing well and half the country is economically depressed. Time will tell.

Central banks often became sources of monetary instability through history. Friedman pointed out the tendency of these institutions of unelected money masters to either over-react or under-react to economic conditions, thereby exacerbating problems.

The book also also talks about what caused inflation in the past.

Mismanagement of money supply
The largest contributing factor to price and asset inflation is usually the central bank or the monetary authority increasing the money supply faster than the growth in supply of goods and services. More money chasing fewer goods.

Government deficits
Politicians who spend more than they collect in tax revenues usually resort to printing money to finance their deficits, leading to inflation.

Of course this inflation might not always show up in official statistics because the numbers are massaged to suit the political agenda. As we see currently, western governments are telling us inflation has come down from nearly 10% to 3%, yet our costs of housing, food and energy are still rising. (I wonder who believes these numbers put out by the government.)

Exogenous events
Less frequently, certain global phenomena, such as a coordinated increase in the price of a critical resource like oil, or a natural disaster, can spur bouts of inflation.

The recent lockdowns and supply chain disruptions caused by the government response to covid & the Russia/Ukraine war are examples of external factors that drive inflationary impulses in consumer prices of some goods.

Everyone should go through this book to realize how Politicians, Central Bankers & Big Banks are to blame for inflation.

Governments globally have been involved in massive fiscal spending, issuing record debt - and central banks have been financing that debt in league with the politicians, expanding their balance sheets to gluttonous levels.

Central banks regulate & give money printing licenses to the commercial banks, who have been creating credit as fast as people want to borrow. Most of the tens of trillions in new money of the last ~decade has been created digitally from nothing by banks in this way.

This is all akin to printing money.

Friedman's theories would suggest that such large-scale monetary expansion would be a direct cause of inflation.

With the US National Debt beyond $30 trillion, this level of debt is alarming. Historically, high levels of debt have put pressure on governments to resort to inflationary measures to reduce the real value of their obligations, effectively paying back their debts with printed-from nothing money, debasing your savings.

This is what we see happening globally, which leads to hyperinflation in some cases (unlikely to happen in G20 countries.)

As Friedman highlighted in various examples, governments and central banks often try to attribute inflation to external factors, blaming 'greedy capitalists' or other things such as employers giving too many raises & citizens spending too much, downplaying or ignoring the role of their own monetary policy manipulations.

Wealth inequality has gotten worse and worse since Friedman's time because of the fiat money and the fallible humans in charge of the monetary levers.

Great book, and I'll probably go through it again some time.

You voted on this review!

You reported this review!