ABSTRACT
This chapter discusses the origin and uses of the word inflation and argues that its definition was a casualty in the theoretical battle over the connection between money growth and the general price level. The Continental Congress issued a paper note to help finance the American Revolution, these “bills of credit” became a circulating medium. The era between the mid-1830s and the Civil War—a period economists refer to as the “free banking era”—saw proliferation of banks. Along with these institutions came “bank notes,” private paper currency redeemable for a specific amount of metal. The idea that the government can “create value” by issuing a paper money and merely stating that it is of value is in direct conflict with the quantity theory of money—and it was a subject of considerable scorn. The term inflation was initially used to describe a change in the proportion of currency in circulation relative to the amount of precious metal that constituted a nation’s money.
