This article was recommended by a commenter. It's lengthy and not all of it is directly relevant to the topic of inflation. Also, although Rand has great ideas, her style of delivery can be distracting to those not already convinced of her point of view. For those reasons, I have chosen to post the excepts I found most pertinent to our current discussion on the nature of money.
by Ayn Rand
Agriculture is the first step toward civilization, because it requires a significant advance in men’s conceptual development: it requires that they grasp two cardinal concepts which the perceptual, concrete-bound mentality of the hunters could not grasp fully: time and savings. Once you grasp these, you have grasped the three essentials of human survival: time-savings-production. You have grasped the fat that production is not a matter confined to the immediate moment, but a continuous process, and that production is fueled by previous production. The concept of “stock seed” unites the three essentials and applies not merely to agriculture, but much, much more widely: to all forms of productive work. Anything above the level of a savage’s precarious, hand-to mouth existence requires savings. Savings buy time...
On a self-sustaining farm, your savings consisted mainly of stored grain and foodstuffs; but grain and foodstuffs are perishable and cannot be kept for long, so you ate what you could not save; your time-range was limited. Now, your horizon has been pushed immeasurably farther. You don’t have to expand the storage of your food: you can trade your grains for some commodity which will keep longer, and which you can trade for food when you need it. But which commodity? It is thus that you arrive at the next gigantic discovery: you devise a tool of exchange—money.
Money is the tool of men who have reached a high level of productivity and a long-range control over their lives. Money is not merely a tool of exchange: much more importantly, it is a tool of saving, which permits delayed consumption and buys time for future production. To fulfill this requirement, money has to be some material commodity which is imperishable, rare, homogeneous, easily stored, not subject to wide fluctuations of value, and always in demand among those you trade with. This leads you to the decision to use gold as money. Gold money is a tangible value in itself and a token of wealth actually produced. When you accept a gold coin in payment for your goods, you actually deliver the goods to the buyer; the transaction is as safe as simple barter. When you store your savings in the form of gold coins, they represent the goods which you have actually produced and which have gone to buy time for other producers, who will keep the productive process going, so that you’ll be able to trade your coins for goods any time you wish.
[Several paragraphs following describing what happens when people trade not with money representing saved production but money representing a promise of future production. Treated as equivalent, the increased amount of "money" gives the appearance of greater savings than actually exists and leads to unjustified increased risk taking, higher prices, and inappropriate consumption of real savings. The disconnection between money and production also allowed the development of the theory of a consumer-driven (as opposed to producer-driven) economy.]
Therefore, they conclude, the consumer—not the producer—is the motor of an economy. Let us extend credit, i.e., our savings, to the consumers—they advise—in order to expand the market for our goods.
But, in fact, consumers qua consumers are not part of anyone’s market; qua; consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of “consumer”; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market’s “supply”; in the role of consumers, they represent a market’s “demand.” The law of supply and demand has an implicit subclause: that it involves the same people in both capacities...
How many non-productive people could you support by your own effort? If the number were unlimited, if demand became greater than supply—if demand were turned into a command, as it is today—you would have to use and exhaust your stock seed... If you understand the function of stock seed--of savings--in a primitive farm community, apply the same principle to a complex industrial economy.
Wealth represents goods that have been produced, but not consumed. What would a man do with his wealth in terms of direct barter? Let us say a successful shoe manufacturer wants to enlarge his production. His wealth consists of shoes; he trades some shoes for the things he needs as a consumer, but he saves a large number of shoes and trades them for building materials, machinery and labor to build a new factory—and another larger number of shoes, for raw materials and for the labor he will employ to manufacture more shoes. Money facilitates this trading, but does not change its nature. All the physical goods and services he needs for his project must actually exist and be available for trade—just as his payment for them must actually exist in the form of physical goods (in this case, shoes). An exchange of paper money (or even of gold coins) would not do any good to any of the parties involved, if the physical things they needed were not there and could not be obtained in exchange for the money...
When a rich man lends money to others, what he lends to them is the goods he has not consumed. This is the meaning of "investment"... [C]redit means money, i.e. unconsumed goods, loaned by one productive person (or group) to another, to be repaid out of future production...
Consumption is the final, not the efficient, cause of production. The efficient cause is savings, which can be said to represent the opposite of consumption: they represent unconsumed goods. Consumption is the end of production, and a dead end, as far as the productive process is concerned. The worker who produces so little that he consumes everything that he earns, carries his own weight economically, but contributes nothing to future production. The worker who has a modest savings account, and the millionaire who invests his fortune (and all the men in between), are those who finance the future. The man who consumes without producing is a parasite, whether he is a welfare recipient or a rich playboy.
An industrial economy is enormously complex: it involves calculations of time, of motion, of credit, and long sequences of interlocking contractual exchanges. This complexity is the system’s great virtue and the source of its vulnerability. The vulnerability is psycho-epistemological. No human mind and no computer—and no planner—can grasp the complexity in every detail. Even to grasp the principles that rule it, is a major feat of abstraction. This is where the conceptual links of men’s integrating capacity break down...The most disastrous loss—which broke their tie to reality—is the loss of the concept that money stands for existing, but unconsumed goods...
An economy based on specialization, division of labor and money is more complex than one based solely on direct barter, but the fundamental issues of production, consumption, saving and trade remain unaltered. Savings provide the escape from moment-to-moment survival, freeing up the time necessary for investments to improve future productivity. This investment in the future is only makes sense if our present and near-future are safe and secure. It is savings (production not consumed) that provides that security. To correctly calculate the extent of our safety-net, to decide how much excess production is available with which to take risks, or to tie up in future rather than immediate consumption, our money must provide an accurate accounting of that saving. The accuracy of that accounting is destroyed when "money" is disconnected from production such as occurs with money created by fiat. Money can fulfill its proper function only so long as it stands for actual existing goods--and this it does by remaining a good itself, i.e. a commodity-money.