Mr. Boyd, a businessman in Fairfield, Connecticut, also is interested in the Fairfield Country Day School where he recently presented these views on inflation to students of the 9th Grade.
Inflation is one of the most abused and misused words in the English language—a word that is on everyone’s lips, yet a word which few bother to define. It has several meanings and most people—even professional economists—use them interchangeably, sometimes within the same paragraph. How can we possibly discuss and reason about a thing whose meaning has not been established? So our thinking is muddled, a Tower of Babel situation has developed, and in our confusion we are fumbling around trying to alleviate results, rather than trying to find and eliminate the cause. This is having a most injurious effect upon our society, undermining our economy, destroying our money, and threatening our liberty—a very serious situation.
So, it is my purpose to see what can be done to set us thinking straight about this matter, to bring some order out of the chaos. Specifically, I shall define inflation so that we’ll know what we’re talking about, show how it works and what it does, trace it back to its cause, and finally suggest a cure. This is a very ambitious undertaking—maybe too ambitious—but worth trying if it sets you thinking.
First, what is inflation? Its basic meaning is a swelling up, a blowing up, a puffing up, an increase, an expansion. In its economic sense the word is used with at least five different meanings:
(1) Any increase at all in the supply of money (money in the broadest sense, which includes credit).
(2) An increase in the supply of money (again in the broadest sense) that outruns the increase in the supply of goods.
(3) An increase in the average level of prices—that is, any wide or general increase in prices.
(4) An increase in the prices of widely used goods—such as steel or lumber or oil or foodstuffs.
(5) Any boom or period of intense business activity or prosperity.
The best of the lot, because it is precise enough not to cause confusion and still simple enough to be widely understood, is number 2—an increase in the supply of money that outruns the increase in the supply of goods.
Empowering the Federal Government to Cause Inflation
Now, using this definition, who or what organization can increase the supply of money? You know the answer: in our country the only organization allowed to manufacture money is the Federal government. Therefore, the Federal government is the only force that can cause inflation. If anyone else manufactures money, it is called counterfeiting. Counterfeiting in principle is the same as inflation; but counterfeiting is illegal, and cannot be done on as grand a scale as inflation.
The effects of inflation are very bad. It causes a drop in the purchasing power of our money—which is another way of saying that it raises prices. But goods and services are not becoming more expensive; it is our money that is becoming cheaper.
Now this process of pumping more money into circulation does not cause prices to rise evenly or all at the same time; inflation never affects everybody equally and simultaneously. If it did, its effects would cancel out. Inflation begins with some particular group. Say the government puts more money into circulation by paying defense contractors or by increasing subsidies to farmers. The incomes of those who receive this money go up first. Those who begin to spend the money first buy at the old price levels. But their additional buying begins to force up prices. Those whose money incomes have not been raised are faced with paying higher prices than before, that is, the purchasing power of their incomes has been reduced. Eventually, through the play of economic forces, the money-incomes of most of them may be increased. But if these incomes are increased either less or later than the average prices of what they buy, they will never make up the loss they suffered from inflation. So a few people gain at the expense of all the rest of us. The hardest hit are retired people and widows trying to live on the shrunken incomes from pensions, social security, or the interest on savings.
Furthermore, inflation reduces the value of ordinary savings, such as savings bank deposits, life insurance, and bonds. This reduces our incentive to save. “Spend now while your money will still buy something,” becomes the mode. Thus, people are lured into extravagance and speculation.
Inflation deludes businessmen as to the amount of capital available and as to the demand for goods. The signals (prices) have been falsified and businessmen therefore miscalculate and make bad investments of scarce capital. These bad investments will later have to be liquidated. This is called a recession or a depression.
Inflation upsets the relationships of goods (prices) and services (wages) to one another, setting group against group, class against class. Those who have suffered loss resent those who profited from inflation. Even the moderate gainers envy the bigger gainers. People see that the new distribution of income and wealth that goes on during inflation is not the result of merit, effort, or productiveness, but of luck, speculation, or political favoritism.
In the end, if it is kept up, inflation destroys our money and creates financial chaos in which our liberty is lost—that is, it brings oppressive government controls of wages, prices, and the use of our property.
Deficit Spending and Monetizing the Debt
Well, you may ask, if the results of inflation are so bad, why does our government inflate? The men in government manufacture money to pay for the costs of their programs which run beyond what they dare collect from us in taxes. The terms for this operation are “deficit spending” and “monetizing the debt.”
What are these programs that are costing so much money? Here are some of them: putting a man on the moon, developing a supersonic transport plane (which would probably be used mainly by the jet set), paying for surplus farm products to keep their prices up, subsidizing our merchant marine in order that the ship-owners can afford to pay the high wages demanded by the maritime unions, rebuilding cities, paying for people to go to school and college, free medical care for the aged, slum clearance, relief, public housing, fighting so-called poverty, unemployment compensation, social security, foreign aid, and—most expensive of all—waging war.
Why doesn’t government cut out or cut down on some of these programs? Each program is popular with some people, they now have a vested interest in it, and the politicians fear that if they cut programs they will lose votes.
So, the cause of government deficit spending and the consequent inflation is the pressure of various groups to get from government special favors and privileges for themselves (this is unintelligent selfishness) and the attempts of other groups to solve the problems of the poor and the unfortunate by using the force of government (this is false philanthropy). Unintelligent selfishness and false philanthropy are based on the theory that everything can be accomplished through the use of force by the state and this use of force is justified by claiming that it is done by democratically-elected politicians for a noble end—”the public good”—or “the greatest good for the greatest number.”
The people in government want to stay in office. For this they need votes. So they want to be good guys and do everything for everybody. Since the end of World War II, they have been pursuing three goals which would seem to be mutually contradictory: (1) constantly rising wages, (2) full employment, and (3) stable prices.
Incompatible Objectives
It does not seem possible that all three of these could be achieved at the same time. If government tries to have constantly rising wages (regardless of productivity), full employment is impossible unless prices can be increased to cover the increased costs; but then more money must be pumped into the economy to enable consumers to pay the higher prices. So, in reality, we would be giving up the goal of stable prices and engaging in a continuous inflation.
On the other hand, the combination of constantly rising wages and stable prices would soon bring on unemployment, while the combination of stable prices and full employment would mean the end of the constant annual “rounds” of wage increases, regardless of productivity. But as matters are, union leaders would never stand for this. So government tries to achieve constantly rising wages and full employment by means of inflation and then tries to maintain stable prices by means of controls. This is like stepping on the accelerator and the brake pedal at the same time. And it always ends in disaster.
Yet, there is a cure for inflation and a way in which the three goals of rising wages, stable prices, and high employment could be achieved, provided these goals are reasonably defined or interpreted. This way is through the restoration of a sound currency and a genuinely free economy. This means that our money must be tied to gold and that our government must be strictly limited to its proper functions of securing our lives, liberty, and property from violence and fraud and of administering justice in accordance with an objective code of laws.
The chain of cause and effect, in which inflation and its consequences are links, begins with the false ideas of statism: that all things are possible through the use of force by government. Since ideas precede and determine actions, it is no use trying to change results far down the line without first entirely exploding the original ideas from which all the other ideas and actions stem. Therefore, the cure for the ills we have been discussing must begin with the refuting and discarding of the ideas of government interventionism and the replacing of these with an understanding and acceptance of the sound ideas of freedom—the free market, private property, limited government philosophy. This requires that we sharpen our minds and discipline our thinking. For man’s only weapon in the fight against error and for the truth is reason.
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Like an Oak Tree
As an oak gathers what it needs by means of its roots and branches, so must we gather what we need by means of our five senses—seeing, hearing, touching, smelling, and tasting. As we feed our bodies by means of physical food and drink, so must we feed our minds by means of knowledge and facts gathered by our senses.
Everything that we are, everything that we hear, everything that we smell, touch, or taste, makes us stronger or weaker mentally. By associating with people who are ambitious, industrious, loyal, and neighborly, we become ambitious, industrious, loyal, and neighborly.
As the dyer takes the color of the dye in which he works, so do we change and become like the persons with whom we associate.
From the Curtis Courier of December ¹969, edited by Thomas Dreier
