Dear Mr. Berko: I’m taking an economics course in college. We’re learning about inflation, and the professor wants each of us to write a paper on this subject. How do you explain inflation? I know that inflation means rising prices, but I can’t understand the idea of how the U.S. dollar can fall in value. The dollar is always worth four quarters or 20 nickels, so how can it become worthless or worth less? I’m writing this letter for myself and the rest of the people in my six-person study group, who are just as confused as I am. We understand that prices for finished products have to go up when companies have to pay their help more and also when raw material costs increase. But we hope you can explain to us, in simple-to-understand words, how a dollar can fall in value.
— GR & Study Group, Durham, N.C.
Dear GR: If you’re willing to wade through the following unorthodox explanation, I think I can help you guys.
Inflation has two meanings. The most acceptable definition refers to the continuing rapid growth in the size of the heads and girth of the bank accountants and members of Congress after they’ve been in office for at least a year. This is the most egregious and evil inflation for three reasons: 1) The growing size of a congressman’s head poisons his ability to intellectually process important information. 2) The growing size of his belly blithely enables him to stomach thousands of pages of rank and self-serving legislation. 3) This is the most difficult inflation to control because too many members of Congress consider personal enrichment to be an entitlement.
The second definition of inflation concerns the sustained increase in the general level of prices for goods and services and is measured as an annual percentage increase. The value of a dollar is defined in terms of the purchasing power it has with respect to a predetermined basket of tangible goods and services. As inflation rises, the dollars you own purchase a smaller percentage of those goods and services. If that basket of goods costs $100 this year and if the inflation rate is 3 percent for the next year, then that basket of stuff will cost you $103 next year. So because of inflation, next year your dollar won’t be able to purchase the same amount of goods and services this year. This is how a currency is “debased” and becomes worth less.
