Inflation originally referred to the debasement of the currency. When gold wasused as currency, gold coins could be collected by the government, melted down,mixed with other metals such as silver, copper or lead, and reissued at the samenominal value. By diluting the gold with other metals, the government couldincrease the total number of coins issued without also needing to increase theamount of gold used to make them. When the cost of each coin is lowered in thisway, the government profits from an increase in seignior age. This practice wouldincrease the money supply but at the same time lower the relative value of eachcoin. As the relative value of the coins decrease, consumers would need morecoins to exchange for the same goods and services. These goods and serviceswould experience a price increase as the value of each coin is reduced.By the nineteenth century, economists categorized three separate factors thatcause a rise or fall in the price of goods: a change in the
or resource costs of the good, a change in the
price of money
which then was usually a fluctuation inmetallic content in the currency, and
resulting from anincreased supply of currency relative to the quantity of redeemable metal backingthe currency. Following the proliferation of private bank note currency printedduring the American Civil War, the term "inflation" started to appear as a directreference to the
that occurred as the quantity of redeemable bank notes outstripped the quantity of metal available for their redemption. The term inflation then referred to the devaluation of the currency,and not to a rise in the price of goods.
Inflation is usually estimated by calculating the inflation rate of a price index,usually the Consumer Price Index.The Consumer Price Index measures prices of