Inflation

Knud Tholstrup

[A paper presented at the 13th International Conference on Land Value Taxation and Free Trade. Douglas. Isle of Man. September 1973]

Inflation -- the falling purchasing power of money -- is the subject of interest and discussion everywhere. Our distinguished economists have not, however, succeeded in accounting for the causes of inflation, which surely is the cardinal prerequisite to its elimination.

Some are of the opinion that the printing press throws out too many bank notes, and others put the blame on wages and prices -- the screw without end.

INFLATION AND NOTE CIRCULATION

A limited understanding of the concept of money leads to the quick, but erroneous, conclusion that too many bank notes are printed.

Despite the fact that, for instance, Denmark has experienced annual increases in prices of 6-7 per cent from 1 968-71 , there has been no increase at all in the note issue in circulation (constantly about 5-1/2 billion kr.).

During the same period, deposit accounts in banks and savings banks have risen from 44 to 55 billion kr. and bond holdings from 62 to 99 billion kr., plus an increase in other mortgage deeds not included in the statistics. This increase in means of payment (proofs of purchasing power) is far greater than the increase in production. These means of payment are used for purchase of commodities and, in particular, acquirement of real estate.

It is logical that the concept "money" includes all means of payment. The greatly extended use of cheques, giro and account cards might well result in gradually halving the note circulation, but anyone can see that this would have no effect on the cost-of-living index.

Money is in fact a written promise of payment. The National Bank, with its two signatures, guarantees that a 1 00-kroner note entitles the bearer to goods of equivalent value. A private mortgage deed for 100,000 kr. only requires one signature.

Purchasing power is the amount of goods or services that can be offered as payment for other goods or services. A Dollar, a Mark, a Pound or a Krone are units of measurement for goods and services. The value of a coin thus depends upon how much it can buy. The National Bank exchanges proofs of purchasing power for those who require bank notes or coins to facilitate everyday purchases. It does not, however, put more notes into circulation than necessary to meet these requirements.

To blame the printing of bank notes for inflation is both illogical and incorrect.

THE RACE BETWEEN WAGES AND PRICES

Rising wages and salaries are often blamed for inflation. This is absurd, inasmuch as increases in earnings generally limp along behind price increases. Denmark's Minister of Finance, Henry Grunbaum has often said that inflation is the price we have to pay for full employment. This is an error of judgement. Full employment was in point of fact achieved in Denmark in 1957-60, when we simultaneously put a stop to inflation.

At times of full employment, the labour force is in the seller's market -- a hitherto unknown phenomenon and something that classic political economists had not even dreamt of. They had only considered situations in which the work force was in the buyer's market, where the weak position of the working man was open to exploitation.

As long as full employment is enjoyed, the law of supply and demand assures the working man a wage level so high that there only remains a comparatively modest remuneration for management and similar yield on capital employed.

On the other hand, there is a definite limit to just how high wages can soar. Wage demands that are higher than can be borne by production, lead to close-downs.

The total real purchasing power of employees and employers is equal to their joint production; it is merely the distribution between the two that has changed. So here too we look in vain for the source of inflation. There will always be equilibrium between the extent of production and the purchasing power production itself brings about.

SOURCE OF INFLATION

Extra purchasing power emerges without production and the greatest part comes from increased land values.

CAUSES OF INFLATION

We permit the rising land values created by the community to find their way into private pockets to become extra purchasing power (for a fortunate minority), without corresponding extra production. Already in existence is purchasing power resulting from work performed and precisely corresponding to the amount of production. The demand for goods made by the extra purchasing power has to be met out of this same production. The resultant pressure of demand leads to higher prices -- which must be paid by all.

In order to understand this, it must be appreciated that there is no difference between the money that is earned through the performance of work and the money that is gained through unproductive increases in the value of real estate.

In this way, the contents of the wage packet are simply eaten away and employees are forced constantly to demand compensation for the undermined purchasing power in the shape of more pay. The State has to collect higher taxes to pay higher salaries to civil servants and bigger pensions and more aid to the victims of inflation -- without anyone being any better off, except inflation, which thrives.

With present taxes and an inflation rate of 7 per cent the employee must be paid 12 per cent more in the course of the year to maintain the purchasing power of his money. Not only must he pay higher commodity prices, but he is cheated out of his share of the progress in production.

It is interesting to note that the effect of 7 per cent inflation on Denmark's national product of 1 50 billion kr. is 10 billion a year. At the same time, Denmark's land-owners -- with emphasis on a small minority - have experienced a rise in the value of their land of just about 10 billion kr.

THE EFFECTS OF INFLATION

A very unequal distribution exists inasmuch as relatively few landowners, without any contribution through performance of work, increase their income and their wealth at the expense of the majority, who in this way thus receive correspondingly less for their production.

Those actively engaged in the economic effort, increase the overall production by 3-4 per cent and thus expect their income to rise accordingly. At the end of the year, however, they realize that real wages simply haven't risen inasmuch as the entire increase has been lost in the reduction of the buying power of the Krone. All progress merely ends in increased land values to the advantage of a small number of individuals, passive onlookers to the economic effort.

THE TWO SIDES OF INFLATION

All attention has hitherto been focused on the "losses" side of inflation. Economists and politicians have, without success, tried one-sidedly to combat the effect, but have through their counter measures done more harm than good.

Had they approached the "profits" side with the same zeal, how easily they could have prevented these profits from arising. Without the "profits" side of inflation, there would be no losses and the unfair distribution of wealth would have ceased. The numerous small house-owners who are also actively engaged in the economic effort, have been pushed into the lime-light by political propaganda in defence of the big landowners' monopolistic interests. However, if only they had studied the "profit and loss accounts" more thoroughly, they would have discovered that their gain from rising house values is negligible compared to their loss. Take for instance, daily price increases, the high rate of interest and rising taxes -- all of which are due to the unequal distribution mentioned.

THE SOLUTION OF INFLATION

Simply channel the increment from rising land values into public funds and use the money to reduce taxation correspondingly, so that the amount that has to be paid extra in land rent, directly, in the form of land tax and, indirectly, through high rents, will be paid less in tax.

A state of balance is thus achieved and only one payment is made instead of two, as in tine case at present where the victims of inflation are subject to private taxation in the way of increased land rent to private individuals, (interest on mortgage deeds), and then in higher taxes to the State because the community does not receive its rightful income (land rent) as compared to its investment.

UNSUCCESSFUL COUNTER MEASURES:

It is the victims of inflation that have to pay for the unsuccessful experiments of our politicians: "consumer-restrictive measures" through "confiscation of the surplus purchasing power" -- by means of higher taxation, naturally -- and "we must lower the steam from the over-heated pressure of demand" by "wages and price freeze".

The result is, however, that these interventions act as a spanner in the works of production itself and thus instead work as production-restrictive measures.

When, in the late sixties, this was tried in the United States, unemployment figures were doubled, without any fall in the rate of inflation. And along came the Dollar crisis instead. This and similar experience in, for instance, Great Britain, should be sufficient to stop these experiments.

It takes a very special psyche to believe that economic crises can be overcome by working less.

The great majority of people either have no or very few private means. The number of those who do, or the extent of their means, has not grown concurrently with the rise in production that rationalisation and technological progress has achieved for the country as a whole, whilst a comparatively small minority have, on the other hand, increased their private accumulation of wealth considerably.

Most of this growth in wealth comes, not from rising production, but from the increased value of real estate created by the community, especially that of land, which as mentioned rose 50 billion kr. in 9 years. The annual increase in land values, which has now reached 1 0 billion kr., is paid for in the way of higher commodity prices by the 5 million Danes at a rate of 2,000 kr. each.

THREE INDICATIONS

If the gains of inflation are stopped, the losses will stop too.

Three instances indicate the truth of this:

In the Soviet Union, where speculation in land is out of the question, the Ruble buys more and more year by year and this despite the enormous and still rising military expenditure which is put on commodity prices.

Land values in the USA have risen 95 per cent from 1962-72 and inflation here is only 3-4 per cent, half that of Western Europe where, for example, land values in Denmark, have risen 300 per cent over the past 10 years. Our rate of inflation is 6-7 per cent. After exorbitant increases in the price of land in Great Britain in 1972, land values will doubtless have increased even more there. The British rate of inflation is also higher, namely 8-9 per cent.

Inflation was brought to a halt in Denmark when the parliamentary majority promised in 1957 to collect increases in the value of land. Increases in commodity prices fell from 5-6 per cent annually to less than 1 per cent on average in the 3-1/2 year period.

An inflation rate of, for example, 6 per cent is often mentioned because this is how much the cost-of-living has risen. However, as rationalisation and mechanisation should lead to lower commodity prices (as is in fact the case in the USSR in recent years), the true rate of inflation is probably a few per cent higher than shown in the index.

The following is thus established:

• inflation means unequal distribution of the results of production.
• the unequal distribution is demonstrated by the double-sided effects of inflation, the losers, on the one hand, who have to pay higher commodity prices and, on the other, the winners of enormous fortunes ;
• the unequal distribution is worsened by the fact that the winners, who often raise a loan in order to acquire real estate, can repay loans in greatly depreciated kroner;
• the injustice of inflation rests in the fact that while the winner gets his "prize" without productive contribution, the loser must consequently relinquish full and rightful payment for his contribution;
• inflation accelerates, with the result that both prices and taxes rise to such an extent that many branches of trade and industry will not, in the long run, be able to meet the high wage demands that are made to cover the price increases, if they are simultaneously to maintain their ability to compete on world markets.
• inflation also accelerates speculation in the price of property and, especially, land, thus increasing capital requirements for those wishing to establish themselves -- to the detriment, in particular, of the young;
• as everyone desires to borrow money to safeguard themselves against inflation through the purchase of real estate, inflation is accompanied by a high rate of interest and thus also high rents " This again is detrimental to young people who wish to set up house or go into business;
• Denmark's experience of a balanced foreign economy is limited to the period from 1 957-60 where inflation was eliminated;
• more and more people have to have social support -- with resultant higher taxes -- because their earnings and savings are eaten up by inflation.

Our experience in the years 1 957-60 simultaneously establishes that:

• inflation can be stopped;
• the interest rate is almost halved when inflation is stopped (low rents);
• the deficit on the balance of payments was settled in the course of the 3-1/2 years without inflation;
• practically the entire wage increase in the non-inflation period was a real wage increase, the highest ever experienced, because the unearned incomes were eliminated and,
• no new taxes were necessary.

Briefly:

Inflation can be stopped at any time by making land speculation an uninteresting proposition. This is done by collecting the unearned increment created by the community in order that it may be used by the community in the reduction of taxation.

The question is, do our politicians really want to stop inflation and have they the courage to do so?