Finally, those who hold the new reins of monetary power turn it to their political advantage by increasing the supply of paper money, without any corresponding increase in the underlying commodity (usually gold). Specifically, the new money is used by the central bank to make loans, in particular by buying bonds from the government and other borrowers. This process, known as inflation, pumps currency into the economy in much the same manner as one might blow air into a bag or a balloon.

The term "inflation" is used here in its original and proper meaning. The more popular (and vague) sense of "general price increases" singles out one effect of the phenomenon, while ignoring the other important and distinctive (if less obvious) consequences of true monetary inflation. Furthermore, prices may be affected by phenomena having nothing to do with inflation. A severe drought may impose upward pressure on a wide array of prices, yet that drought may not give rise to the nexus of characteristic features to be discussed here. Finally, inflation may not always generate widespread price increases, particularly if it occurs during a period of major technological advances leading to increased production efficiencies. For instance, between 1921 and 1929, the total money supply in the United States rose by $28 billion (7.7% per annum), while banking gold reserves increased by only $1.16 billion. Because of productivity improvements during the same period, however, prices remained roughly constant, except for an escalating stock market. This inflation and its consequences were documented in detail by economist Murray Rothbard in America's Great Depression (

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