Unemployment and Inflation:
An Unnatural Choice

F. J. Jones

[Reprinted from ESSRA, Autumn, 1974]

IT is being argued by the non-monetarist school that inflation is "endogenous" and not "exogenous", and consequently beyond the control of the monetary authorities. But this proposition is untenable if a proper distinction between money and credit is maintained. Credit is a bilateral contract between a creditor and a debtor, and no matter how large the credit, it is always exactly counterbalanced by a debt, so that the two together can have no effect on the money supply in so far as they do not increase or decrease the overall monetary pool. Money, by contrast, is a multilateral contract between the public on the one hand and the government on the other, and clearly any change in the quantity of money on the market, has an immediate effect on the value of the units existing previously, decreasing it if the monetary supply is expanded and increasing it if it is contracted. If we wish to maintain the value of our currency, the simple expedient is to stop printing more of it, and then any increase in credit, profits, bonds, etc., will prove to be a measure of our increased prosperity. One can hardly blame people for falling into this error, however, when we find that the monetary authorities have fallen into it themselves by replacing the meaningful statistics of the fiduciary issue (actual note issue from the Bank of England) by the meaningless Ml and M3.

It is argued by others who admit the simplicity of stopping inflation by no longer resorting to the printing presses, that this is a political, not an economic, problem, since sound money means unemployment. The answer to this is that if governments did what was right rather than what was opportunist, they might bend economists1 minds to devising conditions for sound money and full employment. Too many economists seem to think that an incompatibility between these two things is God-given, but the answer to the problem has been known for at least a hundred years. The natural concomitants of sound money are free trade and the untaxing of capital and labour, the active factors in production. With the substitution of an ad valorem tax on the value of land -- the passive factor, these pressures would force on to the market the products and natural resources required to maintain full employment. In the final analysis employment may be defined as the direct or indirect application of labour to natural resources (land). Anything that is allowed to stand in the way or to interfere with this application will cause unemployment.

Both labour and capital have an enduring interest in keeping the wheels of production turning, so the culprits may be found in those responsible, directly or indirectly, for oppressive and disincentive taxation and control, and for allowing artificial barriers to the full use of land.