M. Friedman was born in 1912. When he was asked that whether government created inflation, he answered that the government create inflation in order to get the revenue from it, and the reason it has come down is not because the governments have become more noble but because we can't get much revenue out of it.
He stresses he had given a talk to the Bank of Japan in 1985, on which he based the last chapter of his book 'Money Mischief (1992)'. He entitled it in a Monetary Policy in a Fiat World to quote,' Inflation has become less attractive as a political option. Given that the voting public is very sensitive to inflation, it may currently be politically profitable to establish the monetary arrangements that will make the present irredeemable paper standard and exception to Fisher's generalization'.
In Fisher's Purchasing power of money (1911) he says that every attempt at a paper, money standards has been a disaster. How do governments get money from inflation ? At first number there is the direct value of the high powered money base (H). That is a very small source, its trivial. much more important are two other sources. One is that if your tax system is expressed in the nominal terms, inflation raises taxes without any one having to vote for higher taxes. The second is that, if we have been able to issue securities at an interest rate that is lower than the rate of the inflation, we can expropriate those securities. The expropriation of past debt plus the automatic increases in taxes were undoubtedly the major source of revenue for the USA then from the inflation of the 1970's.
There is no doubt about that, I remember having breakfast in some occasion with the then Senator Long from Louisiana was on the Finance committee. He said, you know we never could have passed these rate of tax on the current income if it hadn't been that they were automatically brought up there by inflation. It would have been politically impossible. The adjustment of the tax rates for inflation, indexing the tax rates, has eliminated one source of revenue. The fact that bond markets had become so much more sensitive to more inflation has eliminated the second. So how much revenue can you now get out from inflation?
It is not worth inflating. If we have inflation in the future, my prediction is that it will only be as an attempt for full employment purposes and not as way to raise the revenue. That is why M. Friedman was am pretty confident that there will not be a major inflation in the future.
So, these were the verses by Friedman. We are wise enough to predict the rest. Rest is history.
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Thank You
Aditya
