Inflation And Deflation
THE CAUSE OF INFLATION
The word inflation means to inflate or blow up, especially with air or gas. Inflation, as it applies to our present money system, means an increase of the volume of money or bank credit in circulation to an amount beyond that necessary to buy, at current prices, the goods and services being offered for sale. Note: It is not just an increase of the volume of money or bank credit in circulation; it is an increase to an amount which will cause an increase in the general price level.
Inflation is made when the banking system makes loans of bank credit (not earned money) for purposes other than loans necessary to finance the sale of goods or services being or about to be offered for sale. Therefore, any loans made by any corporation or person outside of the banking system will not be inflationary. Also the loans of real earned money made by the banking system will not have inflationary effects. Even the loans of bank credit (money the banks do not have but pretend to have) made for the purpose of financing the sale of goods or services being offered for sale will not cause inflation.
An example will illustrate a non-inflationary and an inflationary loan. If a contractor who is building a house which he is offering for sale, is given a loan of bank credit money on that house, that loan would not create any inflation because the bank credit will be withdrawn from circulation as soon as the house is sold and the loan repaid. However, if the person who later bought that house and did not intend to sell it was given a loan of bank credit money for the purpose of buying that house, such a loan could be inflationary because the loan may [p. 96] not be repaid for years, thus leaving the bank credit money in circulation. (A person who buys a house to keep should be given a loan of earned money, not bank credit money; then no inflation would result from the loan.)
Let me give another example to show what happens when more money (medium of exchange) is in circulation than is necessary to buy, at current prices, the goods and services being offered for sale. Suppose you were the owner of a theater with 1000 seats. Now, let us assume you were usually selling tickets for 500 seats. As time went by, you increased the number of tickets that you sold to 600, then to 700, and later to 1000. That increase in the number of tickets you sold did not make or cause inflation. If you then decided to sell 1100 tickets for the 1000 seats, you then would have sold 100 inflationary tickets. Those extra 100 tickets were not bona fide tickets, but they had the same appearance as such. You were not honest at the time you sold those extra tickets. However, if you enlarged your theater to 1100 seats, then the extra 100 tickets would be bona fide and you would not have sold any inflationary tickets.
We see from this that inflation does not just come by itself like a windstorm or a hurricane. It is made by someone who is not honest when he issues inflationary tickets or inflationary money.
Explanation: The theater with the 1000 seats represents all the goods and services that are being offered for sale in the entire country. The tickets represent all the money and credit of all types in circulation, which could be used for the purchasing of all the goods and services being offered for sale in the entire country. When you were selling only 500, 600 or even 900 tickets, you could say you were having a depression. When you increased your ticket sales up to 1000, you were issuing bona fide tickets. You were honest and there was no inflation, even though you doubled the number of tickets from 500 to 1000. There was no inflation because you had a seat for every ticket that you sold.
The point is that it is normal and necessary, in order to have prosperity, to increase the amount of money in circulation [p. 97] up to an amount that is sufficient to buy, at normal prices, all the wanted goods and services which are being offered for sale.
Remember inflation takes place when more money or bank credit, mostly bank credit, is issued and placed into circulation than is necessary to buy, at normal prices, the goods and services that are being offered for sale.
Inflation takes place when more tickets are sold than there are seats in the theater. If for example, 500 of those 1000 seats were destroyed or stolen, then only 500 tickets should be sold because only 500 seats are available for sale. Any tickets sold above the 500 number would be inflationary.
Now, when we are dealing with the medium or exchange that is necessary for the general buying of goods and services those who issue the medium of exchangeif they are informed and practice the virtue of honestywill increase the volume of the medium of exchange only when the amount of goods and services being offered for sale is increased.
Thus we see that the volume of the medium of exchange should not be increased just because the population increased; it should not be increased 3%, 4%, or 5% per year just because of the passage of time. It should be increased only when the amount of goods and services are increased and then only to the amount necessary to maintain the normal general price level.
When we are dealing with theater tickets and seats it is easy to detect the fact when too many tickets are issued and sold because the sales of all tickets are completed at the same time (the time the performance begins).) But in everyday buying and selling, when the buying and selling is a continuing process too much money (medium of exchange) can be issued and placed into circulation without the people being able to easily detect how and by whom it is brought about.
It should be easy for us, therefore, to understand why only the possessor of the goods or services being offered for sale should be the one to issue the media of exchange (certificates of credit) which are to be used for the purchasing [p. 98] of those goods and services. He is the only one who knows how much media of exchange (certificates of credit) to issue; he knows how much good and services he has for sale.
WILL AN INCREASE OF PRICES CAUSE INFLATION?
We know from experience that if the selling price of items which are being offered for sale is increased and the volume of money in circulation remains constant, less of those items will be sold. In fact, if the selling price of those items is extremely high, none will be sold. So an increase in the price of goods or services being offered for sale when the volume of money in circulation remains constant, will cause an increase in the general price level because less items will be sold for those same number of dollars which are in circulation. It follows then, if less items are sold, a reduction of production and employment will also take place.
If we find ourselves in a situation where prices are increased and there is no reduction in the number of items sold at those increased prices, we rightly can conclude that such sales took place only because the volume of money in circulation was also increased. It was the increase in the volume of money in circulation that made it possible for the buyers to pay the increased prices.
EFFECTS OF INFLATION
The banking system or the government that issues too much bank credit or money receives an unjust benefit for a dishonest deed, just as a counterfeiter makes an unjust gain for a dishonest deed.
Another effect of inflation is higher prices, which are an unjust burden for those who are living on a fixed income. We must keep in mind that higher prices, when not due to a short supply of the item, are the effect of inflation, not the cause. An example will illustrate: Suppose, for some reason, there is a very small crop of potatoes during a [p. 99] certain year. In the normal course of events, the price of potatoes will go up. The small crop of potatoes would cause the price of potatoes to go up, but it would not cause inflation. It would not cause the issuing of too much bank credit or money. The small crop of potatoes would not cause all other prices to go up, as inflation would. The price of potatoes would go down the next year if there were a big crop the next year.
Why should the price of goods and services go up just because there is too much of the medium of exchange in circulation? The only purpose for which the medium of exchange is created with justice is to facilitate selling and buying. If there were nothing to sell, there would also be nothing to buy. If there were nothing to sell and nothing to buy, there would be no need for any medium of exchange. In fact there would be no bona fide media of exchange of any kind in existence. A bona fide medium of exchange is created only at the time some goods or services are being offered for sale.
Now let us go back to your theater. You would not sell any tickets for the seats in your theater until you were ready to open up for business. But if you did, those tickets would not be bona fide tickets. You see no bona fide tickets or bona fide medium of exchange would exist until something was ready to be sold. Bona fide tickets represent a just claim for seats in the theater. A bona fide medium of exchange represents a just claim for some goods or services for which it will be redeemed.
Now let us say you are ready to open up your theater for business. You sell 1000 tickets, one for each seat. Your theater is full, the patrons are satisfied, and each ticket holder has a seat.
Sometime later you sell 1100 tickets for your theater. You will then have all of your seats filled and l00 patrons standing in the aisles and along the walls. Note, the value of some of those tickets declined. Some patrons did not have a seat because you sold them non-bona fide tickets.
You later decide to sell 1500 tickets, but then you require that each couple who wish seats will have to have [p. 100] three tickets. Your theater is filled and everyone has a seat, but they paid 50% more for their seats. If you still later decide to sell 2000 tickets, you will require each patron to have two tickets for each seat. The prices of the seats are now double. You see, there were more tickets in circulation (that is, in the hands of the patrons) than were necessary to buy the seats at normal prices (that is, one seat for each ticket). So, in order to redeem all those tickets with the seats you had available, you charged two tickets for each seat.
This gives us some idea as to the reason why prices go up when more media of exchange or tickets are issued and put into circulation than are necessary to buy at normal prices the goods and services that are being offered for sale. But when it is done with non-bona fide money (Federal Reserve notes) or bank credit loaned into circulation, the whole process is concealed from the general public. That is why many people think that inflation just comes like the measles.
CURE FOR INFLATION
Perhaps the most important point to keep in mind when we think of correcting inflation is that we should not cause deflation. We should not even cause a reduction of the inflation. If we do either of the two we will cause unemployment. The degree of unemployment will depend on the degree of the reduction of the inflation.
Inflation should be stopped, not reduced. Then no unemployment will result, no injustice will come to anyone, wages will not have to be reduced, and the general price level will be maintained. Production of goods and services will continue at the usual rate.
To stop inflation it is only necessary to stop issuing inflationary Federal Reserve notes and inflationary bank credit money and accept the going general price level as the normal general price level. That means, under our present money and banking system, the banking system should loan bank credit only for collateral security of goods that are being or are about to be offered for sale; all [p. 101] other loans, including loans to governmental bodies should be made with earned money. As the amount of goods being offered for sale is increased the loans of bank credit for them may also be increased. Then the inflation will not be reduced; it will only be stopped. The general price level will be maintained, no unemployment will be caused, and no injustice will come to anyone.
When we use the word deflation as related to, the volume of money or bank credit in circulation we should mean the condition that exists when the volume of money or bank credit is less than is necessary to buy, at normal prices, the goods and services that are being offered for sale.
When a condition of inflation exists, and that inflation is reduced, deflation does not exist, even if the inflation is reduced to zero. Inflation will be reduced to zero when there is just enough media of exchange to buy, at normal prices, all the wanted goods and services that are being offered for sale. When the volume of the medium of exchange goes below that point, then we can say deflation exists. An automobile tire that has 45 pounds pressure, when it is supposed to be normal with 35 pounds is not in a state of deflation when the pressure is reduced from 45 pounds to 40 pounds, or even to 35 pounds. The fact that the inflation was reduced to 35 pounds did not cause the tire to being a state of deflation. Now, if more air is let out of the tire so that it contains less than 35 pounds pressure then a state of deflation exists. In that same way we should use the term deflation as it relates to the volume of the medium of exchange in circulation.
EFFECTS OF DEFLATION
Since deflation means an insufficient amount of the medium of exchange in circulation, the general effects are: [p. 102]
- A decline in the general prices for the goods and services being offered for sale
- A decline in the amount of goods produced and services rendered
- A decline in employment
- An unearned increase of the buying power of the remaining media of exchange
Note: Those who produce goods and perform services, those who work, and those who produce the things we all need and want - they are the ones who are hurt most by deflation.
CAUSE OF DEFLATION
Because over ninety percent of the media of exchange used in the United States comes into circulation from the banking system making loans to governmental bodies and to private persons and corporations, all that is necessary to make deflation is for the banks to refuse to make loans or for the borrowers to payoff their loans and refuse to borrow.
It is just that simple under our present money system.
That is the usual way the depressions are made. That is the way most of the general unemployment of people is brought about. There is no mystery about the causes of general unemployment.
CURE FOR DEFLATION
Since we know the cause of deflation (an insufficient amount of the media of exchange in circulation), it is not difficult to state the cure. Borrowing the media of exchange appears to help, but it causes big troubles later. The perpetual interest payments become a burden and the people can never get out of debt. As soon as the people issue and place into circulation sufficient bona fide media of exchange, deflation will no longer exist.
Assuming the officials of the federal government are not sufficiently informed to issue enough United States tax credit certificates, notes, and coins, the officials of each [p. 103] state, as well as the officials of the local governmental bodies, should then issue sufficient tax credit certificates to pay for their necessary expenses. In the event that this is done and there still is not enough of the media of exchange in circulation, or in the event that this is not done, then private persons and private corporations should issue as many certificates of credit as are necessary to sell all of their goods and services. This would all be done as outlined in Chapter 2 and Chapter 10.
Even if the federal, state, and local governmental bodies did not issue any tax credit certificates, enough certificates of credit could be issued and put into circulation to dispose of all the wanted goods and services being offered for sale because each seller of goods and services could issue, if necessary, enough certificates of credit and pay them to others so that they, in turn, could buy all the goods or services he offered for sale. The seller of goods and services who issued the certificates of credit would get for his certificates of credit the goods and services of other sellers of goods and services. That is all there is to buying and selling. One possessor of goods and services exchanging his products or services for the products or services of other producers or possessors of goods and/or services. By using certificates of credit as media of exchange the process is made convenient.
Thus we see that the cure for inflation or deflation is the same: the people themselves must learn what a bona fide medium of exchange is, issue it, and use it. They need not and should not borrow the media of exchange.
(Note: The above chapter gives an example of how a theater owner can issue non-bona fide tickets because each ticket was issued as a claim for any seat instead of for a specific seat.
A ticket is more apt to be bona fide if it has written on it the number of the seat for which it is evidence of a claim. Likewise, a document, which is used as a medium of exchange, should also have written on it the specific item or items for which it is evidence of a claim. Inflation then, would never occur.) [p. 104]