Elroy-
To say that increasing the money supply causes inflation overlooks a very important component of the problem--too few goods and services. When there is an overabundance of goods and services to meet the needs of a given population, price competition keeps inflation at bay and all the paper money in the world will not stir it up.
I read an article a short time ago in which the Finance Minister of Japan was being interviewed and he made an interesing observation. He said that "deflation is not a monetary event; it is a structural problem." Too many goods and not enough willing buyers.
I think his observation could just as easily be reversed to define inflation. It is probably structural also, not monetary. Let us say that I am coming to this realization in my dotage. I used to believe that it was purely monetary. (Thus, when the Fed is printing like mad, buy gold.) However, this is much too simplistic.
In the middle of the Great Depression in the US, I don't think inflation could have been created no matter how much money was magically put into people's pockets because people had become to scared to spend money. They would have simply hoarded the excess cash. This an important point. Even with an excess of goods and an excess of cash, inflation could not have gotten a foothold. The economy would still have lacked willing buyers--a structural problem.
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