Generally, inflation is a product of governmental monetary policy. Stable currency isn’t often the goal of the politicians, so we wind up with inflation.
Adam Smith, in The Wealth of Nations wrote: “The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.” If you just print more currency – whether in the Weimar Republic, Zimbabwe, or Washington DC, you’re devaluing the currency – there isn’t much toil and trouble in acquiring it.
If you travel into a third-world country, and tip in one dollar bills, you will see that even a single yankee dollar is valued above the tip in the local currency. There are some nations that have gone through enough inflation (their local monetary policy) that they no longer print their own money. Zimbabwe’s currency is worthless. Ecuador uses the yankee dollar.
Gresham’s law simplified says “Bad money drives good money out of circulation.” Since there are just under 200 nations in the world, and all politicians like to print more money, the simple answer to beat inflation is to have the best money. A century ago, it was probably the British Pound. We replaced that with the US dollar – and over the 20th century, removed the silver and gold backing. Basically, during my lifetime, the US dollar has been the best money available – but not due to monetary policy.
The problem is, long term outlooks only run so far as the next election to most politicians. We need a monetary policy that recognizes the advantages of being the world’s best reserve currency. The dollars that circulate in Zimbabwe or Ecuador aren’t coming home to be cashed in. It’s not like we need to eliminate inflation – we just need to have less than anyone else.
Both Adam Smith and Karl Marx recognized that value is produced by labor. Marx wrote something to the effect “Capital is dead labor.” The monetary policy is fairly simple – make sure you have the lowest inflation rate and the highest opportunity for production. The problem is teaching our political leaders to look further than the next election. We can’t do it as individuals. If our dollar remains the world’s best currency, a lot of Franklins will be stashed in pillows overseas. If it drops, those dollars will come home.