Strantor, It is easier to understand if you start with the primary realization that all money is credit in the first place. Modern fiat money is not collaterized by gold. It is unsecured credit based only on the promise of the the Government. Your $ is a debt incurred by the Fed...it exists as a liability on the Fed balance sheet...its says 'Federal Reserve Note' clearly on the paper. Money is debt. A dollar bill is a zero interest demand note issued by the U.S. Treasury that by law can be used to pay other bills. It is the zero interest start of the Federal debt continuim, where term bills are supposed to carry higher rates of interest. They are all 'money.' Understanding that money is credit should help you understand that when credit expands money expands and when credit contracts money contracts. The rate at which credit expands is 'velocity.' When you see that money is credit (James Grant likes to say, and I agree, that money really is the 'expectation of credit') you can understand that inflaton can only occur when there is an expansion of credit in the aggregate private banking market. The expansion of credit, credit formation, is dependent on collateral. Inflation is characterized by increasing leverage against collateral that is increasing in value (because of the increased leverage); or an increase in usecured lending. A deflation is characterised by credit contraction as collateral values fall; and unsecured lending dries up. Credit doesn't create money; credit is money. Credit expansion is 'velocity'. Go to the Fed Reserve Bank of St. Louis and ponder the 'Velocity' report.