Is Inflation Here to Stay? M. Markovitz

Mr. Markovitz is a commodity research analyst for a New York-based brokerage firm. 238 Inflation has a tendency to ac celerate - to get worse and worse, and at an ever-rising rate. During the past year or so, inflation has finally reached proportions signifi cant enough for everyone to notice its effects, though few understand its cause. Inflation usually is "explained" in one of the following ways: (1) Greedy businessmen, un satisfied with "reasonable" profits, raise prices to line their own pockets at the expense of consum ers. Then laborers have to ask for higher pay in order to maintain their standard of living. Business men, in turn, use this increased labor cost as a pretext for raising prices once more, and a vicious cycle ensues that results in spiral ing inflation. (2) Greedy labor unions, unsat isfied with "reasonable" pay scales, raise their demands in order to line their own pockets at 1974 IS INFLATION RERE TO STAY? 239 the employer's expense. He then raises prices, passing· the expense along to the consumer. The con·· sumer,noting that his cost of liv·· ing is increasing, asks for more of a wage increase. Again, the vic·· ious cycle ensues.

These two explanations are sim·· Bar from an economic point of view, but different from a politicaJl point of view. "Liberal" politician8 tend to use the first explanation" laying the blame conveniently at the door of business, whereas "conservatives," just as conve·· niently, would lay the blame at the door of labor unions. Both ex·· planations rely upon the same economic argument, and each is as false as the other. Monetary Manipulation Inflation is caused by neither business nor labor. The real cause is the government's manipulation of the monetary system. If getting' a raise were simply a matter of demanding it and going out on strike, then why doesn't labor ask for 1000 per cent instead of a mere 10 per cent? And if raising prices were simply a matter of the businessman's whim, then why doesn't he raise prices by 1000 per cent instead of a mere 10 per cent? Obviously, these are ex tremes. But economic principles apply at the extremes as well as in the middle. It should be obvious that, in these extreme cases, it is definitely not the threat of govern ment action that prevents the in creases. Even if the government tried to encourage such huge in creases, they still could not be adopted. Noone would buy the exorbitantly priced goods, so bus iness would fail. Noone would hire the exorbitantly priced labor, so workers would be unemployed.

Yet, even though this principle of supply and demand is obvious in the extreme case, most people tend to lose sight of it when only small amounts are involved. In order not to lose sight of it, let us ask: Why wouldn't people buy goods priced 1000 per cent higher? Why wouldn't business men hire labor costing 1000 per cent more? The answer is simply that they can't afford it. They haven't got the money. Now, let's carry this one step further. The same principle that applied to the extreme case of 1000 per cent above, also applies to the case of 10 per cent, or even the case of 1 per cent: Consumers can't pay even 1 per cent more for all their purchases unless they have 1 per cent more money. Bus inessmen can't pay even 1 per c'ent more wages unless they have 1 per cent more money. Where does this money come from? The government prints it on pieces of green paper, calls it 240 THE FREEMAN April "legal tender," and hands it out by various means until it gradually permeates the economy. Thus, it can now be deduced that even the "ridiculous" 1000 per cent increas es are not so impossible after all.

If the government were to inject 1000 per cent more money into the economy, all prices would rise about 1000 per cent~Wage earners would be getting $50 per hour, and a loaf of bread would cost $5. The .only thing that prevents this is the governmenfs decision not to print that much money. Instead, the government prints only 5, 8, or 10 per cent more money each year, so prices rise only about 5, 8, or 10 per cent. (Note, however, that a "mere" 8 per cent annual increase amounts to over 1000 per cent in 30 years, w.hencom pounded.) What does all this mean for the "typical" consumer? In general, it means bad things. Inflation hurts wage earners, those with savings, and those on fixed incomes such as the elderly and the handi capped. Inflation helps the sophis ticated borrowers and the poli ticians. Inflation literally takes money out of the pockets of some and puts it into the pockets of others.

Here's how the whole. scheme works: By a roundabout and com plicated procedure, the Federal Reserve Bank is allowed, in essence, to print money which it "lends~' to the government at in terest. (This, by the way, is where most of the national debt is owed: to the banks.) This money, consists of those green "Federal Reserve Notes" that everyone car ries in his wallet. These pieces of paper used to be redeemable in silver. Now, all. they are is a "promise" - a .promise to pay the bearer one dollar . Not one dollar in silver or gold. Just. one dollar. And what is "one dollar" today? Why, it's another one of those same pieces of paper! In other words, the money people carry in their pockets is really nothing more than a promise to give a promise to give a promise ... with out ever really promising anything at all. Legal Tender Laws A Unique Privilege However, the government has passed a law which gives a unique privilege to the Federal Reserve Bank (a nominally private bank).

The "legal tender" law says that this bank's notes must be accepted at face value for the payment of any debts. Creditors are thus forced by law to accept payment in such paper dollars .irrespective of any loss in value on·the market. This is very important because it is the key element that makes in flation profitable for the banks 1974 IS INFLATION HERE TO STAY? 241 and the government, at almost everyone else's expense. A large part of the newly printed "legal tender" goes to the government, which then spends it to buy some of the goods in the economy, leaving fewer goods for the rest of us. Since the general public still has essentially the same amount of money it sta.rted with, this money is left to chase fewer goods, the result being high er prices. It all. boils down to the law of supply and demand, which applies to money as well as anything else: if there is more money around, its value per unit decreases. Inflation is this increase in the quantity of money, which "depreciates" the value of each dollar. In this way, inflation amounts, literally, to the theft of the earned values of peo ple who save. It is a disguised tax - it enables the government to take real goods out of the market apparently without anyone having to pay. Everyone does pay, but in the form of higher prices instead of an outright tax. This is particu larly convenient because it enables the government to carry out its policies without being subject to the scrutiny of the citizens. For example, during the Viet Nam war, the government had the Fed eral Reserve print huge sums of money to pay for men and material to fight the war. The current inflation owes much to the printing spree of those years. If, instead, the government had taxed us di rectly' we would have known then how much it was costing us and might have reacted much sooner.

Financing the war by inflation de prived us of this choice. PattersOll' 5 Scheme As a matter of interest, central bank inflation was invented under circumstances of war by William Patterson, a canny Scot who founded the first Bank of England in the 1690's. Both the bank and the King benefited. The bank made fortunes in interest collected on money created out of thin air, by permission of the King. The King was allowed to continue fighting the war. The war had been very popular, but people began to lose their enthusiasm as their pocket books were pinched more and more by taxes. Patterson's scheme al lowed reduced taxes, so citizens didn't realize that their money resources were being depleted through inflation instead. The King was relieved of the distaste ful prospect of having to termi nate the war, Patterson reaped immense profits from his clever scheme, the public was hood 'winked into paying for the whole thing both in money and blood, and the institution of central banking was invented that would 242 THE FREEMAN April continue to hoodwink people for hundreds of years.

Inflation has always been a problem for countries whose gov ernments were allowed to print money without limit. For various reasons, inflation has a strong tendency to accelerate unless it is stopped altogether. Unfortunately, the usual remedy offered by gov ernments is price controls, which cannot work in theory, have never worked in p'ractice, and are not working today, because they do not attack the real cause of infla tion: the wanton printing of paper money. Price controls simply cre ate shortages, as is attested to by our current economic problems. One index some economists use Laissez F aire to predict forthcoming inflation is the Federal Reserve's holdings of government bonds. When these increase, it means that the deci sion was made to print more money to "pay" for them, and that inflation is on the way. The very government officials who pose as "inflation fighters" are in fact the people in society who are most responsible for the inflation in the first place.

The only way to end inflation is to end the unlimited power to print paper money. Unless the legal tender laws are abolished, there is slight prospect of a return to the kind of a hard currency traders would choose as a medium of exchange. t) IDEAS ON LIBERTY IT IS the very essence of prices that they are the offshoot of the actions of individuals and groups of individuals acting on their own behalf. The catallactic concept of exchange ratios and prices precludes anything that is the effect of actions of a central authority, of people resorting to violence and threats in the name of society or the state or of an armed pressure group. In declaring that it is not the business of the government to deter mine prices, we do not step beyond the borders of logical think ing. A government can no more determine prices than ·a goose can lay hen's eggs. LUDWIG VON MISES, Human Action TheNecess DAVID KELLEY ANARCHISM is, on the face of it, a political philosophy; it is, there fore, a theory about the proper re lation between the indi vidual and the government. The theory is very simple: it is that there is no pro per relation between the individ ual and the government - because there ought to be no government.