Inflation: The Endless War Surrounding Your Money

Why does the value of money keep changing? Gain wisdom to protect your wallet through the vast history of inflation.

• Understand the main causes and consequences of inflation throughout human history.
• Grasp the role and policy dilemmas of modern central banks.
• Forecast structural changes affecting future prices, including AI and deglobalization.

Introduction: Inflation, the invisible thief in your wallet

In 2021 and 2022, I vividly remember being shocked by soaring prices every time I shopped at the supermarket. The word inflation is no longer just a textbook concept but a reality quietly stealing the value of money in all our wallets.

This invisible thief has accompanied humanity since the invention of money. Sometimes it acted as the lubricant for economic growth, but the moment it spiraled out of control, it turned into a disaster destroying the entire social trust system. This article is a grand journey guide starting from ancient Rome’s first “betrayal of money,” through the birth of central banks, the tragedy of hyperinflation, and the future price landscape led by AI.

Part 1: The Original Sin – The Birth of Inflation and the First Betrayal

From the inconvenience of barter to the birth of money

Before money existed, a farmer had to go through multiple complicated exchanges to trade one cow for bread, salt, and shoes. This is the problem of ‘double coincidence of wants,’ meaning a trade only happens if the other party simultaneously wants what you have.

To solve this inconvenience, humanity used ‘commodity money’ like shells or salt, and eventually minted coins from metals like gold and silver that do not rot and are easy to divide. Around 650 BCE, the Kingdom of Lydia created the first coins stamped with the ‘king’s seal’ guaranteeing weight and purity. This exponentially increased trust and speed in transactions, but at the same time gave the state the power to deceive that value.

In ancient China, shells were used as money, leaving traces in the Chinese character for ‘wealth’ (貝).

Lessons from the Roman Empire: The first state-driven inflation

The first large-scale state-driven inflation began in the vast commercial empire of Rome. In 64 CE, Emperor Nero reduced the silver content of the silver coin ‘Denarius’ and mixed in cheap copper to cover reconstruction costs after the great fire and his extravagance, a process called ‘currency debasement.’

After Nero, the silver content of the Denarius continued to decline, and by the mid-3rd century, it had almost become a copper coin.

This trick gave rise to ‘Gresham’s Law’ — “Bad money drives out good money” — and led to murderous inflation. Eventually, the monetary economy collapsed, regressing to barter, contributing to the fall of the Western Roman Empire.

Part 2: The Alchemist of Debt – The Era of Central Banks

Central banks born from war and debt

The prototype of the modern central bank, the Bank of England (1694), was established to finance the war with France. The government borrowed £1.2 million from merchants and granted them the exclusive right to issue currency backed by government debt (bonds). This was the birth of the core mechanism of the modern monetary system, combining government fiscal needs and private capital’s profit motive.

The Bank of England became the first modern central bank by gaining monopoly rights to issue banknotes in exchange for funding the war.

The first debate over money supply

During the Napoleonic Wars, when gold convertibility was suspended, the Bank of England overissued banknotes, causing prices to soar and sparking the first-ever macroeconomic debate, the ‘Bullionist Controversy.’

• Bullionists (Ricardo et al.): “Excessive issuance of money supply is the direct cause of inflation.”
• Anti-Bullionists (bankers etc.): “Real economic problems like war or poor harvests are the cause.”

This debate was the first public acknowledgment that increasing money supply causes price rises and later became the starting point for discussions on central bank independence.

Part 3: When Money Dies – The Tragedy of Hyperinflation

What tragedy unfolds when central banks succumb to government pressure and become mere ‘money-printing machines’? The Weimar Republic of 1920s Germany starkly illustrates this horror.

Weimar’s tears: The era of hauling money in wheelbarrows

After losing World War I, the German government printed money recklessly to pay astronomical war reparations. This was a typical case of ‘monetizing fiscal deficits’ and led to one of the worst economic disasters in human history.

As money became worth less than scrap paper, banknotes were used as firewood or wallpaper.

Workers received wages twice a day to immediately buy goods, and life savings became worthless overnight. The middle class collapsed, social trust disintegrated, and this despair and anger became fertile ground for Hitler and the Nazi Party’s rise.

Comparison: Major Hyperinflation Cases

Hyperinflation is not just rising prices but a disaster that destroys the entire social trust system.

Part 4: The Modern Battlefield – From the End of Gold to the 2020 Perfect Storm

Farewell to gold and stagflation

In 1971, President Nixon’s announcement to suspend dollar convertibility to gold, the ‘Nixon Shock,’ freed humanity’s currency from physical asset constraints, ushering in the era of government-backed ‘fiat money.’

Shortly after, the 1970s oil shocks triggered by Middle East wars caused simultaneous economic stagnation and soaring prices, known as ‘stagflation.’ This nightmare was ended by Fed Chairman Paul Volcker, who raised interest rates to 20%, breaking inflation expectations and proving that the central bank’s most important mission is to maintain trust in price stability.

Oil price surges sharply increased production costs, causing global stagflation.

The Perfect Storm: Culprits of 2020s inflation

The 2020 pandemic ended a 40-year era of low inflation with a ‘perfect storm.’

1. Supply shock: Global supply chains were paralyzed by COVID-19 lockdowns.
2. Demand surge: Massive fiscal stimulus flooded money into markets, boosting demand for goods.
3. Energy crisis: Russia’s invasion of Ukraine caused energy and grain prices to skyrocket.

These combined factors collided, causing the worst inflation in four decades.

Part 5: Future Inflation – The New Frontline

The mountain of debt and central bank dilemmas

Global government debt surged due to pandemic responses, increasing the threat of ‘fiscal dominance.’ This means central banks are pressured not to raise interest rates despite inflation because of the government’s huge interest burden.

South Korea faces an especially complex dilemma with the ’twin mountains’ of the world’s highest household debt relative to GDP and rapidly increasing national debt. Raising rates risks collapsing households and the real estate market, while keeping rates low makes controlling inflation difficult.

The song of fire and ice: Two forces shaping future prices

Future inflation will be determined by the clash of two opposing mega-trends.

• The Fire of Inflation:
  • Deglobalization (Slowbalisation): Prioritizing security over efficiency raises production costs.
  • Greenflation: Prices of key minerals needed for green transitions soar.
  • Demographic changes: The era of cheap labor ends, increasing wage pressures.
• The Ice of Deflation:
  • Artificial Intelligence (AI): Dramatically boosts productivity across the economy, reducing costs.

Conclusion

The history of money is ultimately a story about ’trust.’ We have trusted the king’s seal, government promises, and the competence of central banks. Inflation is the clearest symptom when that trust wavers.

• Key Summary:

  1. Inflation is a trust issue: The value of money is based on society’s trust that governments and central banks will maintain that value stably.
  2. History repeats: Excessive national debt and monetizing fiscal deficits have historically always led to inflation tragedies.
  3. The future is more complex: Future prices will be decided by the tug-of-war between deglobalization and green transitions (inflationary forces) and AI technological advances (deflationary forces).

• Next Action (CTA): Now, we should not ask “Will inflation come?” but rather “What kind of inflation, and which sectors will it hit?” Understanding this complex interaction is the first step to protecting our assets in an uncertain future.