Inflation: A Monetary Phenomenon

Two years ago, when inflation in Canada was soaring, the Atlantic Chamber of Commerce offered advice on how to avoid repeating the same mistakes that lead to high inflation and reduced economic growth. Canada is now at a point where we are slowly approaching the 2% inflation target after 2 years of hammering the economy with high interest rates. Government and the Bank of Canada are already beginning to celebrate this as a win, but it is far from that. The symptom of high inflation in Canada is the result of a sickness our country has called money printing.

The Bank of Canada created about $370 billion between February of 2020 and September of 2021. This excessive increase in the supply of money directly contributed to the rapid rise in inflation and then as a response, the rapid increase in interest rates. They also attempted to dismiss critics of their money printing initiative by claiming it to be misinformation, claiming they didn’t “print cash to finance the federal government.” In this statement, they’re overtly and intentionally misleading the public. The Bank did not print cash, but they did print money. In monetary terminology, cash falls under the category of money, but money doesn’t fall under the category of cash. The Bank has other methods of increasing the money supply outside of printing actual cash that we use in our day-to-day transactions and relied on using words synonymous with each other in an attempt to mislead the public.

Elected officials are also complicit in driving money printing. Deficit spending fueled by printing money is a recipe for disaster as each time a government has rapidly increased the money supply throughout the course of history, inflation has followed. And much like the Bank of Canada, many politicians in Ottawa have attempted to author their own opinions on the cause of inflation. They downplayed the potential for inflation, then dismissed it to be transitory, then went on to blame international conflicts, and eventually came to blame corporate greed. Milton Friedman was one of the world's greatest thought leaders in economics and truly excelled at grasping the root cause of inflation as he knew and understood the history behind increasing money supply and its ramifications. He concluded that inflation is a monetary phenomenon, not the result of greed or any of the other factors. If inflation was truly a result of greed created under capitalism, why has it also historically appeared in communist countries? The answer is that is not exclusive to capitalism or communism, it is exclusive only to central banks that create it.

How does Canada prevent the same mistakes from happening again with inflation? Our leaders in Ottawa need to end the culture of deficit spending and government intervention in the economy. After that major hurdle is cleared, then it is time to create a competitive fiscal policy and stable monetary policy with no rapid changes in the money supply. Slow and stable growth in our money supply is what Canada needs to prevent inflation and deflation.  These steps will require a substantial change in approach from both elected official and bureaucrats as it greatly differs from the economic theories they follow. Having all levels of government embrace the freedom of the market and abandon interventionist policies is long overdue.