Consider this concrete example:
"...let us imagine the great Roman Empire. In your mind's eye see the powerful Caesar sitting on a throne overlooking a sea of tens of thousands of heavily armed Roman soldiers all equipped with the finest weaponry in the world. Can you feel the power, pomp and ceremony that imaginary visual creates? If you can picture the army, consider for a moment the cost to outfit such a fearsome and powerful military force. Imagine having to feed, clothe, and arm such an army of men and horses. The cost would have been astronomical.
"Now think of Rome itself, the splendor of rome, the lavish architecture, the water and irrigation systems, the coliseums; we have all seen pictures of what Rome must have looked like. Breathtaking yes, but now think of the cost to maintain all of that. We have to wonder, "How did Caesar pay for it all?" The answer is that Rome's powerful army provided much of the money required to cover such a huge cost. The Roman Empire actually stole much of its wealth from its conquered territories. In addition to this, Caesar collected tribute, not only from the victims of war, but also from his own citizens. These taxes were heavy. Tribute, as it turns out, was more a protection fee, than an actual voluntary payment. The threat of force was always used in order to collect it. There was one other thing that we should mention about the wealth of Rome. There was never enough money. Caesar had an insatiable appetite and no amount of money would satisfy.
"Typically, at the end of each year's tax collection and after all the plunder from conquered territotries had been brought into Rome, Caesar would realize that he still had a lot more expenditures than gold. What is Caesar to do? He knows better than to ask for more tax money. If government taxes the people too much, a revolt is the result.
"Instead, Caesar comes up with a clever scheme. He orders his ministers of the treasury to clip all of the edges of the gold coins in his possession and with the clippings makes more gold coins. Now he has more gold coins and he can meet his expenditures. In taking this action we should immediately notice that Caesar has secretly tampered with the value of the money. He has devalued the money by reducing the weight of each gold coin. Additionally, he has increased the money supply (measured in terms of coins) and he will be the first to benefit from this increase.
"Up to this point the reader may be thinking this is a fairy tale altered solely to be used as an example. It is an example; however, this is also documented history (with some of the details being simplified for our exposition). It actually happened. So we need to continue with this story to its end in order to see its application to our economy...
"So now, Caesar is able to pay for all of the required expenditures with the increased money supply, plus perhaps a few other luxuries for himself. It follows then that the people waiting to be paid can now be compensated and the new money goes out into the economy of Rome. Now let's say you are a Roman merchant in Rome's market place and you sell fresh fish at a price of one gold coin for a fish. A Roman Centurion, who has just been paid by Caesar with one of these new coins, makes a purchase at your fish market. He pays you one gold coin for the fish, but upon closer examination of the coin, you immediately realize that there is something different about it. You reach into your own pocket and pull out one of your coins and compare it to his. There is a difference! The next step in the transaction should be obvious. You quickly demand two gold coins for your fish. It is the only right and fair thing to do, since the new coins have a lower gold content. But you can also see how this same type of transaction will be repeated countless times thorughout the entire Roman economy with this new money, and each time, prices will be increased on all goods and services. It was Caesar's counterfeiting that caused the increase both in prices and in the supply of money. That is the main point to understand.
"This story, unfortunately, does not end here. Actually, the following year Caesar is again faced with the same problem. The loot from all conquered lands has come in and so has the tribute, but it is not enough gold to pay for everything. Caesar starts to pull the same clipping of the coins trick again, but he notices that the gold coins have now all been notched with ridges around the edges. The people have gotten wise to the trick! They have put a mark on the money so that any newly clipped coin could easily be spotted. (As a matter of historical information, these notches, or rings around the edges of coins are known as reeding. Symbolically, our own coins are reeded to exemplify our government's protection against a counterfeiter clipping our coins.)
"Not able to clip the coins again, Caesar dreams up yet another scheme. This time he orders all the gold in his possession to be melted down and a base metal to be mixed in with it. From the increased mixture Caesar is now able to create even more coins. Once again, this is another form of debasing the money in order to create more of it. As before, the increased money floods the market place and prices on everything increase again. This counterfeiting practice continued for many years until the Roman coin contained less than one percent of the true precious metal. Consequently Roman money became totally worthless. The entire monetary system collapsed. In an attempt to arrest the spiraling prices--which were the inevitable result of the inflation--the Roman authorities enacted strict price controls. But stripped of the legal ability to raise the prices of their products in line with their escalating costs, merchants simply went out of business. The population could no longer obtain the necessities of life and fled the city for the countryside, where they could try to live off the land. All of these disruptions made Rome vulnerable to foreign invaders, ones who had previously been easily repelled. But ultimately it was not barbarian conquerors who brought down Rome. Debasing the monetary unit is actually what caused the fall of the Roman Empire.
"Can all see the significance of this piece of history? When the value of the money is deliberately diluted you need more of it to buy what you need. Prices necessarily rise everywhere. Isn't the story the same today? This loss of value in the money supply is happening not only with our own dollar, but with all currencies worldwide. Prices are also rising everywhere throughout the world, as quoted in the local currency. Increasing the money supply, as you can see, is not unique to Casear. All governments have done this in one way or another. It is inherent in the nature of government, not only to control the money supply, but to tamper with it for the benefit of the government first. It is legalized assault on private property."
(the italicized quote taken from How Privatized Banking Really Works by L. Carlos Lara and Robert P. Murphy, Ph.D.)
So, inflation has to do with the quantity of money in the system....and, this is what leads to the rise in prices. It is the devaluing of our currency. Because each dollar is worth less, the number of dollars required to buy a good must go up...because, the good is still worth the same to us as before the dollars were devalued.
You may have noticed prices rising... Our government has pumped so many dollars into the system over the last years, that this is inevitable. Inflation has been the norm in our economy for many many years, because the Federal Reserve can literally print money whenever they want to. This has not always been the case in the United States.
"The word 'inflation' originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended...to use it to mean "a rise in prices" is to deflect attention away from the real cause of inflation and the real cure for it." --Henry Hazlitt
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