Money Reform and the Control of Inflation
- What is inflation?
- Economic Detriment.
- No Control Over the Money Supply.
- Inherently Inflationary.
- Inflation-free Money.
- Avoiding Hyper-inflation.
- Direct Control.
- Download this page as a leaflet.
Inflation is the depreciation of the value of money. It is experienced by individuals and businesses as an increase in prices, as more money being required to buy an amount of goods and services than hitherto.
It is caused either by there being too much money in circulation for the goods and services available or by a shortage of one or more items, particularly major items (such food, oil, etc.). It will be seen that these two causes are essentially different sides of the same coin, reflecting the changing availability of goods and services to the amount of money that there is. An increase in the money supply will tend to cause general inflation, whilst a shortage of a particular item will tend to cause price rises only for that particular item.
Whatever the immediate cause of inflation, the nature of the money involved is irrelevant. A pound has the same buying power at any given moment, whether it was created as a pound coin in the Royal Mint or as a computer entry as part of a bank loan.
Inflation is detrimental to an economy because it causes instability and uncertainty. People are less likely to save and invest if the value of their savings and investment is undermined by inflation. If money loses its value very rapidly, the prudent person will spend their money as quickly as possible to get maximum benefit from it.
During the 1970s, Britain experienced double figure inflation which exacerbated industrial unrest as people agitated to get pay rises to maintain their living standards. As a consequence of this experience, British governments have made the control of inflation a central part of their management of the economy.
The high levels of inflation of the 1970s and 80s were caused by rapid rises in oil costs and by the disconnection of the US Treasury bond from gold in 1971. The rapid growth in the money supply during this period was due to a rapid rise in bank lending, as bank deposits were no longer tied to gold.
Unfortunately, as the creation of the money supply has slipped further and further out of the hands of the government, the government has been left with no direct control over the amount of money within the economy and hence of no direct control over this side of the 'money = goods' equation.
The only marginal influence that a government agency has over inflation is through the bank base lending rates set by the Bank of England's Monetary Policy Committee which meets once a month. (Before 1997, these rates were set by the cabinet). Raising interest rates reduces borrowing and so reduces the amount of money that is borrowed into existence, but higher interest rates themselves add to inflation as businesses pass on their higher costs to customers.
A further feature of the impact of interest-bearing debt money, such as money that is created when someone takes out a bank-loan, is that more money is needed to redeem the debt than money is originally created, because of the need to pay interest upon it.
In other words, in order to meet the interest payments upon money created as an interest-bearing debt, more money has to be created, and if that extra money is also created as an interest-bearing debt, then more money has to be created in order to meet the interest payments on that money! And so it goes on.
The nature of money created as an interest-bearing debt is thus inherently inflationary. It might only be at quite low levels of inflation, in the region of 3% or 4%, but it is insidious and unstoppable year on year, underlying whatever other inflationary pressures there might also be within the economy, for example from oil price rises.
The only way to eradicate this inflationary tendency would be to replace money that is created as an interest-bearing debt with money that is NOT created as an interest-bearing debt, money that does not require an additional sum, over and above the amount created, to be paid as interest.
It would be quite impossible for private banks to issue such non-interest-bearing money. Without the application of a rate of interest to a loan, even at a very modest rate, there would be no incentive for a borrower ever to repay a loan.
Therefore, such non-interest bearing money would need to be created by statutory authority. This interest-free and debt-free money, created by the government, would further benefit an economy by reducing the need for taxation. This new government-created money would not need to be created entirely as cash, as it presently is, given the declining use of cash. It could be easily created as a sum in a government bank account (with the Bank of England), and spent upon public works accordingly.
Of course, care would need to be exercised that neither too much nor too little money was created in this fashion, and the monitoring of inflation within the Bank of England's Monetary Policy Committee would be a good basis for assessing the amount of money needed to be put into circulation by government spending departments.
Elsewhere in the world, the excessive issue of a currency has often given rise to inflation, even to hyper-inflation in some cases. In many modern day developing countries, for example, some governments have proved themselves to be quite irresponsible in very many ways, their poor financial control being just one of their failings. The poor management of their economies is no more an argument against our government issuing money any more than their poor record on human rights is an argument against Britain having a police force.
Nearer to home, the extreme example of inflation that still casts a long shadow over monetary policy is the hyper-inflation of the German mark in 1923. In December 1923, the value of the mark had fallen to 4,210,000, 000 to the dollar. The reason for this collapse in the German currency was that following her defeat in the First World War, Germany has required to pay reparations. These were priced in marks. So the more marks that were printed off, the quicker the reparations would be paid.
Such examples of hyper-inflation have no relevance in modern Britain. Instead, given the central role that the control of inflation has within the policies of all of the major parties, possessing direct control, rather than distant influence, over the money supply would make this policy all the more easier to attain.
Further counter-inflationary measures would also be enabled by the issue of money solely by the government. Its need to tax would be reduced and so both consumers and producers would be better off without having to seek price or wage increases. Also, the government would have more money available to spend on projects to reduce the inflationary impact of diminishing resources. Enabling more energy conservation and renewable energy projects to be financed to mitigate the impact of increasing fossil fuel prices upon the economy.
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