Libertarian Land Philosophy:
Man's Eternal Dilemma
Oscar B. Johannsen, Ph.D.
BOOK VII: RESULT OF STATE'S INTERFERENCE
Chapter 1 - Inflation
Power tends to corrupt, and absolute power corrupts
absolutely. [Lord John Acton --Letter to Mandell Craiqhton, April 3,
1887]
A word which keeps bobbing up, much like an irrepressible imp, in
almost every discussion on economic principles is "inflation ".
Endless confusion has revolved around it. To some it is a cause, while
to ethers it is an effect. Regardless of what it may be, there appears
to be almost universal agreement that the demon's most vexing
characteristic is that prices rise.
At least, the rise is irritating after it has been pursuing a steady
upward path for some time. At first, it may have been viewed with
equanimity, particularly if prices had been quite low. It is
comparable to the feelings of a person afflicted with a chill. At
first, any temperature rise might appear quite pleasant, but when it
turns into a burning fever, patently it becomes highly undesirable.
Possibly some glimmering of what inflation is may be gained from
consideration of a feudal king's crafty scheme to relieve himself of
his onerous debts. If he owed 50,000 ounces sterling, that is, 50,000
ounces of silver, the liquidation of this debt could he quite simply
accomplished by merely repudiating it. But these titled bandits had
learned to exercise an admirable forbearance in the use of their armed
might. It was not because they had suddenly become endowed with such a
simple virtue as integrity. Rather, it was because such tactics
precluded their obtaining future loans. Wisdom decreed that, at all
costs, the appearance of having discharged their debts be maintained,
if at all possible.
It would not take long for some wily courtier to evolve a cunning
plan to liquidate the 50,000 debt. The noble king taxed the people,
assuring them, no doubt, that it was for their own good, to obtain
25,000 coins. Each weighed one ounce, and had imprinted on the face
the words ounce sterling, meaning one ounce of silver.
Surreptitiously, the coins would be melted down and re-minted to
appear exactly as before with only half the weight. He now could have
50,000 coins minted, with the imprint "ounce sterling ",
though each only weighed half an ounce. And so the king blithely would
liquidate his debt with them. (Actually, any reduction in weight would
probably be less than one-half as the royal brigand would be much too
considerate of his creditors' feelings to make the chicanery so
obvious. The assumption that the weight is halved is to make the
example simple).
Now that the coinage of the realm has doubled, as the creditors spend
the coins, the people would find themselves in the pleasant position
of having more coins than usual. They would, quite likely, purchase
more goods. With the supply of goods remaining the same, prices would
rise. Unconsciously, the people would be discounting the lightweight
coins, but as far as they are concerned prices are rising.
If the people awaken to the fact that the coins have been debased, it
would not be long before the king's swindle would be justified by
skilled sophists. Learned treatises would "prove " that the
purchase of goods with a coin on which appeared the words "ounce
sterling " was not the exchange of goods for an ounce of silver.
Instead, it would be argued that the exchange was for tale, that is,
for a coin which had these words imprinted on its face, regardless of
the weight of silver. It gains a certain measure of credence because
it is assumed by many that the exchange of goods for money is not
barter but something else. Were it clearly recognized that money does
not change the nature of any exchange from barter, the argument that
goods are exchanged by tale and not by weight could never get off the
ground. But, as this confusion exists, the sophist position is readily
reinforced by the king's judges who solemnly proclaim that exchanges
are made by tale, and as such legal and proper.
With double the coins in circulation, it might appear that after a
time all goods would double in price. However, such is not necessarily
so. People, fortunately, are not automatons. Though eventually they
may become well aware that the weight of two of the new coins is equal
to one of the old, they have difficulty adjusting to that fact.
Because more coins are in their possession, they feel wealthier. This
is because valuations reside in the mind, and it can do strange
tricks. Changes in the quantity or quality of money have unpredictable
psychological effects. Robots would conform unthinkingly, so if
previously an article sold for one coin, automatically they would use
two of the lightweight coins. With people, however, while valuations
would certainly change, they would not be uniform. Some prices might
be double, some less, some more. By and large they would tend to be
higher but just how high would be unpredictable.
Most people claim that inflation is this increase in prices. Others
argue that the increase in the number of coins is inflation. Both
effect and cause are given the same name. Were it not so serious, the
complications arising from this absurdity of confusing cause with
effect would provide material for a comedy worthy of a Moliere.
Possibly in the millennium, when the economic and monetary
disciplines embrace a scientific methodology, a definition will be
formulated to which all will agree. Until that happy day arrives, the
writer hopes the reader may find the definition which is to follow a
workable one.
The dictionary states that "inflate " means "to swell
with air or gas; expand or increase abnormally or improperly".
Accordingly, the expansion in the quantity of money improperly could
be called inflation. Debasing coins in order to increase their number
would thus be inflation.
It might not be amiss at this point to note the differentiation
between a rise in prices caused by a perfectly legitimate increase in
the quantity of money and a rise in prices caused by an illegitimate
increase.
If new goldfields are discovered so that an unusually large increase
in the quantity of gold bullion appears on the market in a short
time-span, prices will be affected. Something comparable occurred in
Spain in the 16th Century when its adventurers brought over huge
quantities of gold which they stole from the Aztecs. Prices rose.
Should this increase in the quantity of money be labeled inflation or
not? This writer thinks not. Economically there was nothing improper
in the increased amount of money. That it was stolen is another
problem. As the reader knows quite well by now, all exchanges are
barter exchanges. Thus, the ratio at which an exchange is made is
affected by the increase or decrease of goods on both sides of the
transaction, all other things being equal. If the quantity of money
(gold) remains the same, and the quantity of wheat should increase.
then the tendency would be for more wheat to be exchanged for a given
quantity of money than previously; that is, the price of wheat would
fall.
However, prices are also affected by what happens to money. If the
quantity of money increases while the quantity of wheat is the same,
then the tendency would be that more money would be surrendered than
previously; that is, prices would rise. There is nothing improper or
unethical about this. In a dynamic economy, businessmen are constantly
striving to reduce costs so they can capture the market by exchanging
more goods for less money; that is, for lower prices. At the same
time, particularly if prices happen to be falling, other men are
producing more gold (money) because with prices falling, they can
obtain more goods for their gold. But the increase in the quantity of
gold tends to raise prices. There is this constant interplay between
gold (money) and other goods.
One of the factors which has made gold preferable as a medium of
exchange has been that its discovery and production have been so
limited. The new quantity entering upon the marketplace is relatively
small, so its effect on prices has ordinarily been minor.
Occasionally, however, as in the case of the gold discoveries in
California and South Africa, plus the introduction of more efficient
means of production, as the cyanamid process, there may be periods
when the quantity of money has an unusual increase in some part of the
world. In such a place, prices will probably rise, or at least will
not fall as much as they would have if increased production of other
goods otherwise would have occasioned a drop.
This may cause some problems, but then problems arise whenever any
new process of discovery sharply increases the production of some
article. For example, new and more efficient methods of producing
television sets brought their prices down drastically. Those who had
purchased the early sets had perfectly usable ones, but had they
waited, they might have purchased them for probably much less.
This is a part of life. All of us are cognizant of it. A woman
purchases a "simply darling " dress at her favorite
emporium. A week later, the same dress is on sale at a 2O% reduction.
She may be quite put out, but the dress is just as useful as if the
price had jumped 20%, which would have delighted her.
Any increase in money which is the result of natural and normal means
should not occasion too much dissatisfaction. A creditor may fret that
he is being repaid in money with less purchasing power. However, as he
loaned a certain amount of gold and received the same quantity in
return, he has no complaint.
A housekeeper lends her neighbor ten pounds of sugar and expects the
return of the same quantity of sugar. That the price of sugar may be
less when it is returned has no bearing on the loan. Would she be so
crass as to ask her neighbor for more sugar because such may be the
case?
The Injection of a relatively large amount of money (gold) into the
marketplace cannot in the nature of things, be a constant one. If such
were the case, people would simply step using gold as money, just as
they stopped using tobacco as money when its production became so
great. The introduction of an unusually large quantity of gold
probably would occur only for a short time. Prices would adjust,
taking into account the trading proclivities of the people. What is
called the price level might be higher than previously, but once
established all other relationships would tend to become similar to
those existing before the influx of the new money.
This is quite different from an increase in the quantity of exchange
media caused by minting coins which are half the weight of the old
ones. This is an act of chicanery. The increase in prices is actually
the discounting of lightweight coins. Once the discounting process has
been completely assimilated, it might be found that after taking into
account people's psychology, prices would be pretty much the same as
they had been in terms of actual weight of the metal. An article might
now cost two lightweight coins whereas before it cost only one of the
heavier coins.
Although any difference between an increase in prices which occurs as
a result of a natural increase in money (gold) and an increase in
prices through debasing usually the coinage is usually ignored, this
writer feels it should be emphasized. The difference is between a
perfectly normal change in the quantity of money through the ordinary
processes of people trading with one another, and an act of chicanery.
On the one hand is sound money; on the other, counterfeiting.
In the case of sound money, people can and do adjust fairly easily,
probably without realizing it. If they do become aware, they probably
appreciate that the situation is unusual and unlikely to recur very
often. In the case of counterfeiting, as they awaken to what is
happening they fear that the sharp practice will become the usual one,
and only too likely to recur on a constantly increasing scale. If the
noble buccaneer debased the coinage once, he will do it over and over
again since it is much easier than collecting taxes.
In the age of the feudal lords, inflation might have been defined as
follows:
Inflation is the alteration of money improperly for the purpose of
increasing the quantity of coins, all of which bear the same name as
the old coins, but are of a lesser weight and/or quality. This results
in a discounting process by which the people, consciously or
unconsciously, attempt to correct the adulteration, causing prices to
rise.
Where actual money is the sole form of exchange media in use, the
only means by which inflation could occur would be through corrupting
the money itself. This would mean either decreasing the weight or the
fineness of the coins, or both. While this is manifestly unethical, it
has at least one advantage. People eventually understand what has
happened. They realize that the reason prices are higher is because
the coins are lighter or of poorer quality. As a matter of fact, if
old coins are still in circulation, two sets of prices would exist.
There would be prices in terms of the old coins and prices in terms of
the new ones. The people would be only too aware that the principal
reason for the rise in prices was the debasement of the coins.
Today, inflation is accomplished by means so much more subtle that it
is not understood by many. Whereas the old royal pirates might have
debased their coins surreptitiously, inflation now is carried on quite
openly. Secrecy is not necessary, not only because the means of
implementing it can be so complicated that few understand it. Far
worse, a school of thought has arisen which views inflation as a good
policy, at least if it is a modest one.
In most modern countries, the banking system is the means by which
the exchange media is inflated. The money (gold) is given the
tenderest of treatment as it is left severely alone. As a matter of
fact, some nations, as the United States has done, forbid or inhibit
its use. The coins and ingots are not debased. Instead the inflation
is accomplished by means of money-aids.
Countries may simply issue currency, commonly known as "paper-
money " with nothing whatever back of it. Presumably they are
banknotes for they may be issued by the central banks of the
countries, or they may be notes of the governments, such as United
States notes, which came to be known as "greenbacks ". This
airy substance is known as fiat money. Such nations pay many of their
expenses by printing these beautiful pieces of paper. Rarely is there
any expectation that these pieces of paper will be redeemed in money
(gold).
But most of the more powerful nations look askance at such
simplicity. Sophistication is the order of the day. What could be more
chic than to make use of the banking system to achieve the same end?
Besides being so fashionable, the intricacies of banking obscure what
is taking place. This protects the people from troublesome worry about
their money. Not being able to understand it, they leave it to the
experts. (That the experts have done an excellent job of inflating the
exchange media, in the United States without the people realizing it
until recently is evidenced by the astronomical amount of money-aids
which have been created.)
Briefly, what is done is that a government will sell bonds directly
or indirectly to its central bank. This bank, in turn, prints
banknotes with which to purchase the bonds. As far as the general
public is concerned, all that has happened is that the government has
done what everyone as doing. It has borrowed from a bank. However,
students of banking classify this stratagem as "monetization of
government debt ". This, as has been previously noted, is a
misnomer for the debts of the government have merely been replaced by
the debts of its central bank. Even Aladdin's genie could not make
money (gold) out of debts. But as the central bank' s circulating
debts have been most thoughtfully declared to be legal tender by the
government, and as the people hove become educated to assume that such
debts are money, it is not surprising that this phrase now adorns the
language. What has occurred is that the government by means of its own
agency, the central bank, has printed "paper-money ". But
this fact is camouflaged by first printing a bond and then exchanging
it for the paper-money of the nation's bank. Cynics call this fiat
money, one step removed.
Countries which have attained the sophistication of America do not
merely print more banknotes. Rather, in addition, they write up demand
deposits. In the United States, for example, the inflation of the
so-called "money-supply" is attained not only by printing
pieces of paper, as Federal Reserve bank notes, but by writing up
demand deposits which are not backed by goods coming to market. These
demand deposits are the principal means of increasing the quantity of
money-aids. In the main, the technique adopted is to sell government
bonds, directly or indirectly, to the banking system. They are paid
for by either new Federal Reserve notes, or more usually, by new
demand deposits.
Government debt is not the only debt monetized. In a sense, it can be
said that all private debt utilizing the services of commercial banks
is monetized. But not all such debts constitute an inflation of the "money-supply".
Debts backed by goods coming to market bring into existence money-aids
which are a perfectly legitimate and sound means of facilitating
trade.
As a rule of thumb, it might be said that in the United States the
inflation of exchange media is attained partly by printing banknotes,
but primarily by pen scratches on the ledger books of banks. Few
understand exactly how it works although the textbooks on banking
explain it quite well. The technique is so complicated, hemmed in by
so many rules and regulations, that it is a nightmare. But the
complexity serves the government quite well. Inflation can be carried
on quite openly with few appreciating how it is being done. Better
yet, it helps to create befuddlement as to just what is inflation. Is
it the increase in the "money-supply ", or is it rising
prices? To judge by most discussions on inflation, people apparently
assume it is rising prices. So, instead of looking at the cause of the
inflation -- the government -- the people are engaged in acrimonious
disputes with businessmen, labor unions, and others who are blamed for
the higher prices.
If banknotes and demand deposits are taken into account, how might
inflation be defined?
Inflation is the increase in the quantity of exchange media by
improper means through the debasement of money; or the increase in
money-aids, with little or no wealth which is coming to market in back
of them, all of which bear the name of the monetary unit. This
increase in debased money or money-aids results in a discounting
process called rising prices as the people, consciously or
unconsciously, attempt to compensate for the increase.
That this definition is far from satisfactory is obvious. It is much
too cumbersome and verbose. A rule of thumb definition which is quite
popular is that "inflation is too much money for goods coming to
market ". While this has the merit of brevity, it does not
indicate that the increase in exchange media is an improper one. That
is important. Why? Because inflation is cheating by the issuer of the
exchange media. No matter what specious rationalizations may be
advanced to justify it, inflation is nothing more or less than
counterfeiting. A counterfeiter who mints lightweight coins is
cheating. If he also issues banknotes which are exact duplicates of
those of a bank, he is cheating. If somehow he induces banks to credit
him with deposits based on collateral which does not exist, that would
also be cheating.
Although a government may be impelled by the noblest of motives,
whether it knows it or not, when it inflates the "money supply "
it is in the same position as a counterfeiter. If it debases coins, it
is obviously counterfeiting them. If it prints banknotes or causes
demand deposits to be written up with no intention of redeeming them,
is not this the same action as that of a counterfeiter? [1] Although
the government may not wish to do it, in effect it is cheating its
citizens, just as a counterfeiter does. These are strong words, but
how else should one characterize this artifice?
Possibly the best way to understand inflation is by reverting to
fundamentals. The purpose of exchange is to trade one good for
another. Exchange media arose to facilitate this process. Since it
came into being in response to the needs of the people in trading
goods and thus has some relationship to goods, anyone who deliberately
increases money-aids which do not have this relationship is
perpetrating a fraud.
It constitutes a disturbance in the marketplace which is puzzling. At
first, the people are not certain what has occurred. They expect to
exchange an apple for an orange with exchange media as the catalyst to
effect the transaction efficiently. With counterfeit money-aids
injected into the market, they discover that somehow an apple has been
exchanged for half an orange. What took place is hidden by the
intricate relationships of exchanges. However, when the process is
unraveled, it is discovered that someone received half an orange for
the fake money-aid he issued. He gave nothing and received something.
What he received, someone else lost.
Inflation is presumed to benefit debtors at the expense of creditors.
But is there a Solomon wise enough to explain why a man who owes
another should not live up to his obligation? Ah , but the debtor is
poor and the creditor is rich. Possibly, but is that any excuse? In
the United States, it may not even be true. It is believed by some
students of the problem, that the creditors are primarily the poor and
those with low incomes. They put their small surplus funds in banks
and financial intermediaries, as savings banks. The debtors may be
well-to-do people, who use the exchange media they borrow for
productive or other purposes. But whether the debtor is rich or poor,
he is in honor bound to live up to his obligations. And who is the
biggest debtor? It is the United States Government.
Is it poor?
Most of us are both debtors and creditors. To the degree that
inflation may "benefit " us as debtors, it may harm us as
creditors. The assumption is that generally the mass of the people are
more likely to be in the debtor than in the creditor class. This may
be true of what is usually called the middle class. Paradoxically,
however, it is probably not true of the poor. As they are
impoverished, their creditworthiness is low, so few people will extend
credit to them.
In one sense, the poor do not stand to lose much from inflation as
they have relatively few assets. In another sense, they stand to lose
very much for they may be unable to obtain the goods they require for
subsistence. Their incomes are hardly likely to keep pace with the
rate of inflation, so they may actually suffer from lack of food,
clothing and adequate shelter. And the excuse for all this is that
inflation helps relieve them of their relatively small debts.
People with considerable assets stand to lose. A person whose assets
consist of bonds may lose all as the bonds may be paid off in
worthless exchange media. A shrewd individual will juggle his assets
and may invest in land and durables until the inflation is over. But
he will have to take great risks. Many even stop investing and instead
save wealth though that means losing income they might have earned.
This is quite true in the United States and Europe. More and more
people are exchanging their "paper-money " for silver or
gold, which they hoard. The reader will- recall that saving is wealth
which is hoarded as contrasted with investment, which is wealth
loaned. Hoarded wealth yields no return, but at least it is there when
needed. Investments may be lost entirely for they may be liquidated in
worthless "paper-money".
As is well known, those on fixed incomes suffer terribly from
inflation. The weaker and older members of society probably pay the
biggest price. Pensioners' incomes do not rise but their expenses do,
so the squeeze on them is serious. Others on fixed incomes, as civil
service employees, such as teachers, policemen and firemen also
suffer. However, as they are in the prime of life, they do not sit
beck supinely. Instead, they resort to action, If vociferous pleas on
their part to the taxpayers are not heeded, they may strike. Social
disorder arises on an increasing scale, which seems almost
inexplicable to the people.
No one benefits from inflation. Speculators may be pleased for they
expect to gain from rising prices. However, many learn the hard way
that inflation is not a one-way street to prosperity. The discounting
which goes on, that is, the rise in prices is also accompanied by a
fall in prices as the psychology of the people changes and as other
factors affect the thinking of the people.
Strictly speaking, in an inflationary period it might be better if
the word prices was surrounded with quotation marks to indicate that
it actually consists of two elements. Price is the ratio, at which
goods are exchanged for money (gold). When a government, as the United
States, forbids people to use money, then an additional element creeps
in. This is the discount which people place on the government's
willingness or ability to redeem its paper currency into money. If
people have little faith, the discount will be great so that the "prices
" of goods will be high. If conditions change, and it appears
that the government will redeem, then the discount will drop, and "prices"
will fall.
For a practical example of this, all one needs to do is to study the
history of "greenbacks " from the Civil War until 1879, when
they became redeemable in specie. During that period, at one time $1
in gold was the equivalent of $2.85 in "greenbacks ". After
the Resumption Act was passed in 1875, and when despite the opposition
of easy--money men, it became clear that the "greenbacks "
would be redeemed on January 1, 1879, the premium on gold dropped so
that by December 17, 1878, $1 in gold was the equivalent of a $1 "greenback".
During the period, then, from the Civil War to 1879, the "price "
of a good was the amount of gold for which it would exchange. The "price"
of the same article was the number of "greenbacks" required.
The difference between the two was the discount which the people
placed on the government's willingness to redeem the "greenbacks".
Speculators who borrow heavily on the assumption that "prices"
will continue to spiral upwards, may lose. When their debts come due,
the people's confidence that the paper currency will be redeemed may
have risen so "prices" would be low. At the same time, "prices"
(in terms of money, i.e. gold) may have dropped for other reasons.
Speculators forced to sell at that time will almost certainly lose.
It is pointless to debate who suffers the most or the least, or who
benefits. It is comparable to speculating on who suffers the least
when an epidemic sweeps a country. All are In danger of contracting
the disease. A physician, who one would think should know how to take
care of himself, might be the first to succumb. Others, who are
ignorant or careless, may come through the trying period with little
or no trouble. No one can foresee that.
It is the same with inflation. Students of money, who may have
studied past inflations, and believe they are armed to cope with
easy-money, may lose all their possessions, while many, with little or
no understanding. may wind up wealthy. But even the successful gambler
suffers. The ease with which he may have made his riches may give him
a false evaluation of himself and his fellowmen.
Often the end result of a ghastly inflation is that a dictator arises
who brings some order out of the mess. He would most likely appear on
the scene in a nation where land is expensive and monopolized by a
relatively few. In America, even though the Continental currency of
Revolutionary times became worthless, the country did not slide into a
dictatorship. This may have been because land was cheap and fairly
easy to obtain. Whether the United States will be equally as fortunate
after the present inflation is ended is something on which no wise man
would dare gamble.
Recapitulation
Much of the perplexity over inflation is occasioned by the fact that
it is simultaneously defined as being the effect as well as the cause.
Most call it an increase in prices, but this is really the effect.
Actually, it is an improper increase in the quantity of exchange
media.
Inflation may be defined as follows:
Inflation is the increase in the quantity of exchange media by
improper means through the debasement of money, or the increase in
money-aids with little or no wealth coming to market back of them, all
of which bear the name of the monetary unit. This increase in debased
money or money-aids results in a discounting process called rising
prices as the people, consciously or unconsciously, attempt to
compensate for the increase.
Strictly speaking, in an inflationary period in order to indicate
that this discounting is going on, prices should be contained in
quotation marks. This would help indicate that "prices "
appearing on the marketplace contain two elements.
One is the actual price of the good, that is, ratio at which the good
exchanges for money (gold). The other is the discount placed by people
on the government's willingness and/or ability to redeem the
money-aids in money (gold).
Governments are responsible for they control money and banking. The
excuse offered is that inflation is necessary in order to solve
economic problems. However. in the long run, just ends require just
means. Since inflation is a form of cheating, it is unjust. As such,
it constitutes an unjust means to attain what may very well be just
ends. But this is impossible, so inflation instead of yielding the
ends desired, causes great economic distortions and enormous social
unrest.
In a society in which land is expensive and monopolized by a relative
few, the end result of an inflation may quite likely be a dictator. In
a society where land is cheap and owned by many, it may be that a
dictatorship will not arise although it is possible.
NOTES
- Prior to 1964, a Federal
Reserve note, such as one for $5, had on its face "Federal
Reserve Note The United States of America will pay to the bearer
on demand Five Dollars". This was obviously an IOU of the
Reserve Bank issuing it, and also, by law, an obligation of the
government. Beginning with the 1963 Series, Federal Reserve notes
left off the words "will pay to the bearer on demand'.
Legally, these notes are still obligations of the Reserve Banks
and the government. It is left to the reader to decide for himself
whether leaving these words out implies that the government never
intends to redeem its paper currency.
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