SA9. Inflation by Tommas Graves

By Tommas Graves – Inflation is not Price Change, but a sustained reduction in the value of money, which will lead to an increase in all prices.

We may consider Inflation under two types, Physical and Subtle.

Physical.

By this we mean more units of currency or bank credit entering circulation than is needed to effect the exchanges currently in being. How does money enter into circulation?

The system in this country is that new money is mostly created by the commercial banks by the authorising new loans. However, the money does not become effective until spent. When the banks make loans, the loans come with terms, time of repayment and interest rate. It circulates until repayment time arrives and then that money is dissolved. So the stock of money is the outstanding amount of loans spent and not yet repaid.

This has advantages.

In the first place the stock of money is more or less at current values, because it has been exchanged for a quantity of goods and services. The amounts recorded as the loan stay fixed until repayment so that what is dissolved is the same as what has been created. The total given for M4 is about one and a quarter times GDP, and considering the large loans for major works, ships etc, seems a reasonable amount.

What about cash?

Since the Banking Act of 1848, all cash, or legal tender, has entered into circulation along with bank credit. No cash has been spent directly by to Government, who spends through an account with the Bank of England. Legal tender is about 3% of the total, though this rises a bit at Christmas time, but if you need some, you go to a bank and draw from either a deposit you have already made, or from a new loan.

So the supply of money is always a current value, fresh, and arises naturally from the requirements of people for loans. Money which enters circulation in any other way, for example by direct government issue, would be a dead hand on the economy. It has been tried, but leads to disaster.

Reform?

There are those who think that our whole system of money creation should be reformed. We think this is dangerous, and in any case, the reforms are rarely thought through. This is not to say that nothing has gone wrong, but it is not the system of money creation. The trouble has lain in unrestrained trading in monetary instruments. We would suggest that a principle should be established that a loan cannot be sold to another party, so that the lender is always responsible for collection of repayments.

And the Government?

Government expenditure is met from taxation or borrowing. This means that it only uses existing money, as its borrowing is from the public, the same source as taxation. So new money does not get into circulation that way.

There seems to be no correlation between new bank lending and inflation, although both vary. No doubt this is because of the belief in repayment. Also, it should be noted that a loan which is not repaid is “written off” by the lender, that is it is deducted from the funds of the lender. This may take time, but eventually it will be so.

So, our conclusion is that, at least in this country, we are fairly well protected from inflation due to physical inflation.

Subtle.

Here we are on much more slippery ground. So much depends on confidence and belief.

The stock of money is used as a store of value. If we have doubt about its staying power we might all buy antiques, and the value of antiques would go up, and the value of money would go down.

In recent years we have had only modest inflation, and this is said to be due to;

Cheap goods from China

People getting older – they resist price rises

But of course there have been times of high inflation. As Chancellor, Mr Lawson made a policy of matching sterling to the deutschmark, and we had inflation. Cause and effect are difficult to trace, and there are time lags.

Confidence

So far we have not said much about land values. But what about our values? The situation where the values created by society as a whole are taken by landowners as rent, does this seem right?

Is this one of the reasons for the growing gap between the rich and the poor? And because the public revenue is diverted we have to have a tax system, which takes from people what is theirs by right, the product of their work. This leads to the cost of wages being about twice the value which we obtain as a result of our work, division in the workplace and complications galore.

And at the bottom of the heap is created those whose work is not sufficient for life and taxation, so we have a welfare state, which costs more tax. All this because we ignore the simple fact that land is free!

Conclusion

If we ignore natural law, then a feeling of unfairness creeps into our affairs, and we think this will lead to inflation by a change in our values. Compare this with a scenario in which publicly created revenue is used for public purposes, and individual created revenue is kept by those who create it. The flow of money would adjust of itself, and the result would be much more even. Many more smaller balances rather than a few huge ones, and this would change our banking system.

A feeling of fairness in society would then eliminate inflation.