President Clinton, and his supporters, never seem to tire of telling us that inflation is "down," and the economy is healthy. Indeed, we hear this so often that we are justified in having doubts about it. What is the truth about inflation?
The dictionary tells us that inflation is a sharp and sudden increase in the supply of money or credit. We know, from firsthand observation, as well as from sources such as the Federal Reserve Bank of New York, which tells us in its booklet Keeping Our Money Healthy that "The Federal Reserve system operates only with credit," that there is no money in our monetary system. Inflation, therefore, is a sharp and sudden increase in the supply of credit.
One way of regarding inflation, therefore, is as a process: a blowing up, or inflating, of credit. Who is responsible for inflation? Those who can sharply and suddenly increase its supply: the banks. Modern money, or credit, originates in the banks. You and I (unless you are a banker) cannot create money. Bankers, on the other hand, create it every time they make a loan. If the loan is for a million, and the repayment, plus interest, totals two million, it is obvious that the "money supply" (defined as money in the hands of the non-bank public) will shrink by a million as the loan is repaid. Since nearly all (95%) of our credit came into existence as a loan, were no further loans made, the supply of "money" would dip into minus numbers as repayment took place. This is obviously an impossible situation; new borrowing is essential and inescapable if the economy is not to atrophy. Thus, new infusions of credit (i.e., inflation) must constantly occur, and in ever growing amounts, if the supply of credit is to remain large enough for business activity to take place, and loan repayment to occur. As the American economy becomes saturated with debt (credit, inflation, "money") new borrowers must be found abroad to allow for the inexorable expansion of credit required by the fiat system. Thus, inflation is an essential element of our monetary system, not some aberration or mishap. It cannot be "controlled" because it is the engine of credit expansion which is, as we have seen, essential to the operation of the system.
Another way of regarding inflation is as the thing inflated: the credit supply itself. What is sharply and suddenly increased with each new loan is the "money" itself. In this analysis, modern money is itself, therefore, inflation. This is verified by officials of the Treasury who do not shrink from admitting that it costs only a few cents to print a bill. (In truth, it costs nothing: merely order an extra few bills to pay for the rest). If the bill in question is for $100, it would seem a reasonable question "How can 10,000 cents "cost" three cents?" When a person provides 10,000 cents of goods or services for three cents of paper and ink, he is working for three cents in wealth (i.e., money) and 9997 cents in credit (a Latin term meaning "he believes it") or modern money, or--inflation!
Very well: if inflation is the "money" itself, who is responsible for it? Again, the banking system. True enough, the government prints the actual scrip, but only when it receives an order to do so from the Federal Reserve System. This is one form of inflation that the system can, and will, reduce or entirely eliminate. The use of cash provides privacy in transactions, and leaves no record. Those who manage our economy (a euphemism for managing our society) are walking a tightrope between too much and too little credit; they need to have information to avoid excesses in either direction, and they cannot obtain this from private, cash, transactions; hence such transactions are penalized by tax reporting requirements. Also, the convenience of "electronic" banking is emphasized. No need to handle that dirty old "money" at all! Just let the bank transfer electronic impulses which correspond to the hours of your life you spent acquiring them. A blown fuse could render years of your life worthless, but not to worry! The system is foolproof---maybe. But it is wishful thinking to believe that eliminating the inflation known as currency and replacing it with electronic entries is not merely substituting one form of inflation for another.
Inflation, therefore, has not been brought under control, nor can it be, given the nature of our system. The economy cannot truly flourish when burdened with the debt that keeps the system from imploding. (Gold and silver did not have to be returned to their source, much less with interest!) The cure for inflation is easy: the Constitution. Congress shall coin money. No state shall coin money. No state shall make anything but gold and silver coin a legal tender. Were those officials who swear allegiance to this document true to their oaths, modern money, inflation, and the evils attendant to them, would not, and could not, exist; and our politicians would have one less thing to lie about.
Dr. Paul Hein
13 January 1998phein@inlink.com
Also by Dr. Hein:
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