A Simple Model That Explains Inflation

There were 100 pieces of gold in the market. People used those 100 pieces of gold for trade. One loaf of bread could be bought with 1 piece of gold. A worker earned 1 piece of gold per day.

One person began hoarding gold. He stored 99 pieces of gold in a warehouse and did nothing with them. Now there was only 1 piece of gold left circulating in the market. A loaf of bread could now be bought for 0.01 gold. The person holding 99 pieces of gold could purchase 9,900 loaves of bread.

The government noticed that there was too little gold in circulation and issued 99 more pieces. Thus, the market once again had 100 pieces of gold in circulation. A loaf of bread returned to the price of 1 gold. The hoarder could now buy 99 loaves of bread.

So he went ahead and bought the bread. As a result, the market ended up with 199 pieces of gold. Now the price of bread became 2 gold per loaf. The worker was still paid 1 gold per day, which meant he could only eat 0.5 loaves of bread per day.

After some time, the worker’s wage was raised to 2 pieces of gold per day. He could once again afford 1 loaf of bread per day, and felt relieved.

But then, someone else started hoarding gold. This time, inspired by the previous process, the new hoarder decided that instead of simply “doing nothing” with the gold, he would come up with a way to gain even more profit.

What would he do?