The strong relation between the money supply and consumer
prices is a worldwide phenomenon. No sustained inflation is possible
without continuous money creation, and every hyperinflation in history
has been associated with an explosion of the money supply. There is
overwhelming evidence that countries with high monetary growth ex-
perience high inflation, while countries with restrained money growth
have low inflation.
Why is the quantity of money so closely connected to the price
level? Because the price of money, like any good, is determined by sup-
ply and demand. The supply of dollars is printed by the central bank.
The demand for dollars is derived from the demand of households and
firms transacting billions of dollars of goods and services in a complex
economy. If the supply of dollars increases more than the number of
goods produced, this leads to inflation. The classic description of the in-
flationary process—“too many dollars chasing too few goods”—is as apt
today as ever.
190 PART 3 How the Economic Environment Impacts Stocks
FIGURE 11–1
Money and Price Indexes in the United States, 1830 through December 2006