INFLATION - A BEDTIME STORY

I remember the first time I pondered inflation.  I was a junior in high school and my history teacher spoke about how things cost so much more now because of inflation.  He didn't elaborate but I remember thinking, "Can we NOT have inflation?  If so, how?"

Well, here we go...

In order to get re-elected, politicians realized the easiest way to get votes was to promise people "free" stuff.  Since nothing is really free, they would have to take money from some people to give the people that voted for them "free" stuff.  This was not popular; you could imagine if you were of the people who were losing money to the politicians to fulfill their promises.  

The politicians decided it would be easier if they promised people "free" stuff but instead of taking money from some people, they would just print money to satisfy the recipients of the "free" stuff without aggravating anyone else.  There was one problem with this, the group of politicians whom we will call "congress" were by law strictly prohibited from printing money : (   [Article 1, Section 8, U.S. Constitution]

Since congress couldn't print money : (  they hired a bank, whom we will call "The Federal Reserve," to print the money for them, that way they could have an endless supply of money to give out their freebies but were never actually printing the money themselves... they were so smart.  The nice men at the bank said they would do this as long as they were the only bank allowed to print the money and that they would be allowed to make the rules for other banks to follow.  There was one teensy-weensy problem with this however;  the bank would eventually need paid back and with interest too.  This wasn't too bad though because if congress needed more money, the nice men at the Federal Reserve would just print them more... Yippeeee!

You may be wondering... "What does this have to do with inflation? How does this make things more expensive today than in the old days?  How is my dollar not worth as much as it was for my grandpa?"  Let's think of it this way:

Let's say that oranges are very difficult to come by.  They only grow in certain areas of the world and it takes a measurable amount of work to get them.  This makes them valuable and rare.  They are nutritious and delicious which makes them desirable.  People decided to start trading oranges for other services like, "I'll give you 3 oranges to fix my toilet!" - "Great! I know how to fix toilets and I sure don't want to get scurvy!"

Now let's pretend that you have a magic wand and can make oranges appear out of thin air.  You could be the richest person in the world!  You make oranges by the truckload and start selling them, trading them, using them to stuff your mattress, heck you even just start giving them away because you are feeling generous and you have so many.  But soon something strange would happen.  Oranges wouldn't really be that desirable anymore and they wouldn't be very rare at all.  If your toilet broke you could offer to give someone oranges to come fix it but how many would you have to offer now?  Sure you would have single-handedly eradicated scurvy but I guess your offer would depend on how many oranges are being circulated across the world wouldn't it?

That is basically what has happened to your money...