Inflation Revisited

Inflation, never far from the economic spotlight, enjoyed top billing at Alan Greenspan's recent appearance before Congress. The Federal Reserve Chairman expressed concern about inflation, which he considered more worrisome than the Japanese economic slowdown.

Of course, Mr. Greenspan didn't define "inflation;" no one ever does. Among the unwashed masses, the word signifies rising prices; among those with somewhat greater awareness, it refers to an increase in the supply of money and credit. Often the word "sudden" prefaces "increase."

While monetary inflation has occurred in the past, as in the influx of gold from the New World into Europe in the days of the conquistadors, it is impossible today in an economy that functions solely with credit. Inflation, then, is a credit-driven event--or thing. Let's see.

When a large corporation borrows millions for plant expansion or renovation, where do those millions come from? If borrowed from a bank, they flow from the money-creating pen of the banker. Banks do not loan deposits; they create them in the loaning process. Millions of new "dollars" of credit are created, de novo, in an instant. If inflation is a (sudden) increase in credit, the loan, of itself, is pure inflation. The increase in credit is inflation by definition; and it is always sudden. You cannot bring millions of bucks into existence slowly.

Or consider our coinage. The U.S. mint takes a few cents worth of base metal (base metal coins, by the way, are legal tender for no more than 25 cents), stamps it into a "dollar" coin, and what is the result? Three cents of money, and ninety-seven cents of inflation. Coins, therefore, are less inflationary than bank credit: 97% inflation vs 100%! The same can be said for paper currency: nearly all inflation.

Is there anything else we use for money? Checks transfer inflation from one account to another, but no increase in credit (i.e., inflation) results from their use. Thus, if you borrow 10,000 from your brother, it is not inflationary. Borrow it from a bank, and 10,000 new "dollars" spring to life--competing with existing ones. Inflation is inextricably linked to modern banking; concern about inflation which does not include concern about modern banking procedures is pointless.

When Mr. Greenspan indicates concern about inflation, therefore, he is indicating concern about the increase in what passes for money. His hint that increases in interest rates may be necessary confirms this. "The risks of a pickup in inflation remain significant," he told Congress. Obviously, if too much inflation, or money creation, presents risks, then the solution is to cut back on that creation, and that can be done by raising interest rates, thus making borrowing (i.e., money-creation) less likely, or more difficult.

What are the problems posed by money creation, or inflation? The obvious one is rising prices. The banker can, with the stroke of his pen, contribute millions to inflation. The manufacturer, by contrast, can only slowly add millions to the marketplace in the form of new goods, or wealth. Increase buying power without commensurately increasing objects to be bought, and prices will go up, unless you can persuade the holders of money to put it in retirement accounts, education accounts, or savings accounts.

In one sense, this is a minor problem. You may cringe when the price of bread triples, but if your income triples along with it, you aren't being hurt, at least when buying bread. But, of course, that isn't universally the case. Some will have increases in income which outstrip the rise in prices; they will favor inflation. Others, however, are at the opposite end of the economic spectrum. The retired, for instance, are on "fixed" incomes (meaning constantly decreasing in terms of "buying power," the only way modern money can be evaluated), and if the price of bread triples while their income remains the same, howls of pain will be heard from the retired segment of the population. Well, retirees are an organized, powerful group. So boost Social Security benefits--at the expense of the working middle class, which is unorganized, and marked for destruction.

Savers, too, will be hurt when the interest earned on their savings (which will be taxed!) does not match the increase in the general level of prices. The result is political pressure, and therein is another problem. Those injured by inflation vote---some more than others. Of course, no political party is going to do anything about inflation, because no cure is possible, save a return to Constitutional money, which is too unlikely to contemplate. But promises can be made, benefits promised, and incumbents turned out: the ultimate political catastrophe for those feeding at the public trough.

Taxes provide a solution to the inflation problem, and are enthusiastically levied by those who wish to keep the problems stemming from inflation minimal and disguised. Keynes pointed this out when he wrote "If, however, a government refrains from regulations and allows matters to take their own course, the worthlessness of the money becomes apparent and the fraud upon the public can be concealed no longer." The regulations referred to are taxes, of course, but also a variety of cost-increasing government rules--with fines--applied to businesses to keep them in "compliance."

The Fed's Beardsley Ruml pointed out in 1946 (!) that taxes for revenue were obsolete; there was no need for such taxation when the government could make its "obligations" money. Taxes, and other government-imposed fees and charges, serve, rather, to keep the inflation out of the marketplace, which is the only place where its "value" can be determined. Being nothing of itself, bank credit, or inflation, can't be valued in terms of weight or purity, but only in terms of "buying power." If you don't have any, you can't buy anything! The marketplace is the crucible which tests fiat; if the test is not to indicate the worthlessness of the money, the supply of the stuff must be curtailed, and taxes do this quite nicely.

Taxes also serve, Ruml pointed out, to redistribute the wealth. This makes the lower classes of society (voters, and lots of them) grateful to the government which robbed Peter to pay them, and poor robbed Peter can't speak out against this assault without being made to appear heartless and contemptuous of the less fortunate. This ploy is still being used today, successfully, by the tax-and-spenders in Congress against any who dare suggest moderation. In addition, modern psychology-based government successfully persuades its victims to accept taxation, for the good of snail darters, spotted owls, or various other types of fauna or flora. The State, bless it, will save us from the environmental catastrophe of our spending our own money. Of course, the very rich are able to protect themselves from this robbery by a variety of means; it is only the middle class which is targeted by inflation. (It is only the middle class which the State fears.)

Inflation, therefore, is not some quirk of economics. It is not an aberration which somehow snuck up on us. It is the very heart, the essence, of our monetary system. As long as our money supply is imaginary, created instantly with the stroke of a loan officer's pen, that increase in the money supply, or inflation, is going to plague us. With it come high taxes, reduced profitability, diminished savings, as well as a host of other problems relating to the unconstitutionality of the system, and the necessity for political corruption, especially among the judiciary, to sustain it.

Inflation is an evil which exerts its baleful influence throughout society. Gold and silver were gifts of God, and, short of the labor required to obtain them, were ours free. They didn't have to be returned to the source, much less with interest! Inflation, on the other hand, is borrowed into existence from a privileged clique who, by the very nature of the process, enslave those who use it. Such a corrupt system may only be possible in a corrupt society. If so, they deserve each other.