Constantly increasing costs of living – inflation – benefits the powerful and penalises the majority. A return to sound money would solve the problem.
Throughout the lifetimes of almost everyone alive today there has been steady price inflation everywhere. Prices of goods and services – the ‘Cost of Living’ – have risen steadily. On average consumer prices have risen by around 5% per annum since World War II in Britain, but occasionally by much more. For example, in 1970s Britain annual inflation peaked at over 25%.
In many other, less fortunate countries, there have been repeated ‘hyperinflations’ where prices have increased by anywhere between 20% and several thousand percent every year.
This has serious, entirely undeserved, consequences for employees, savers and pensioners, especially in those countries, accounting for much if not most of the world’s population, where hyperinflations have wreaked havoc, wrecking lives and crippling living standards, sometimes on several occasions, over the last century.
There are two important things to understand about inflation.
Firstly, price inflation is not normal. In historical terms, it is unusual and entirely avoidable.
And secondly, it is another scam perpetrated by the deep state and its banker, corporate and billionaire buddies. It transfers wealth upwards to them from people further down the pile.
INFLATION IS A MODERN CREATION CAUSED BY ‘PAPER’ (FIAT) MONEY
Historically, people used precious metals, gold and silver, as money. Neither bankers nor governments can make more gold or silver out of thin air. Both metals cost a lot to mine. Since little gold or silver could be mined each year, prices in precious metal terms tended not to change materially over long periods of time.
The point about not being able to create more money at will is that the more money there is chasing the same goods, the higher prices can rise. No increase in money supplied basically means no ‘inflation’. In practice it really is that simple, so long as defined weights of precious metals are used as money.
The past historical experience of humanity has been stable prices over the long-term, even though in the short-term prices could rise or fall a lot, depending mainly on good or bad harvests.
In the nineteenth century in Britain, for example, money was the gold sovereign, which was simply the one-pound coin of the day. Rapid technological progress reduced the cost of producing consumer goods and services relative to a slowly growing supply of gold. Consumer prices consequently fell steadily, year after year.
It is true that in the nineteenth century bankers could already create ‘money’ out of thin air. More accurately they created ‘credit’ which is all our current ‘money’ is in the absence of a link to gold. Most people still don’t realise that every time a bank lends money to anyone, people, companies or governments, the money lent didn’t exist the minute before the loan was made. The bank then just gets its accounts department to make a couple of book entries in the accounts. It adds the new loan to the asset side of the bank’s balance sheet and the extra cash in the borrower’s bank account to the liabilities side of the bank’s balance sheet. Hey presto, the result is a loan which cost the bank nothing to provide, but which nevertheless pays it interest.
The problem is that eventually there tends to be an awful lot of debt and not a lot of capital in the banks to cover their risk. In the 19th century this kind of behaviour eventually risked the bank being busted if people lost confidence in its tottering pile of loans.
Irresponsible bank lending was and is encouraged by the availability of Central Bank bail outs, and by allowing banks to be limited liability companies, enabling their shareholders and directors to avoid being ruined by their banks’ unsound lending. Neither central banks nor limited liability for banks would be likely to exist in genuinely free societies.
Even under the gold standard, unsound credit creation did lead to unnecessary boom and bust cycles in the economy – via mechanisms that were first and best explained by economists of the Austrian School. Excessive business cycle fluctuations inflicted unnecessary suffering on working people. Repeated ‘depressions’ seemed to discredit ‘capitalism’ even though it was in reality the engine of growing prosperity. It didn’t help that the banker class responsible for the instability prospered throughout.
However, what never happened was persistent ‘inflation’ of the type we now wrongly think is normal. This is because all debts, including bank debts and bank account credit balances were ultimately payable in gold. Gold was the anchor of prices. Before 1914 you could go into your bank and withdraw your cash in gold. The smallest bank note before WWI in Britain was the Bank of England five-pound note. It was worth nearly £2,000 in 2024 pounds. Gold sovereigns and half sovereigns, or silver coins exchangeable for them, were often the only way of making a bank cash withdrawal.
When push came to shove, the pre-WWI system was anchored to gold, which is what mattered. However unwise a loan may have been, it still had to be repaid in an unchanging weight of precious metal. That is why, regardless of errors and shenanigans in the banking sector, no inflation resulted from over enthusiastic ‘money’ (really ‘credit’) creation in the 19th century. Some countries continued to link currencies to gold in the interwar period. The last such link, between gold and the US dollar for government holders, ended in 1971.
By now an obvious question could well be forming in the mind of the attentive reader. Why not reintroduce a gold-based, and or a Bitcoin-based monetary system? Persistent consumer and asset price inflation would cease virtually overnight. Longer term, steady falls in the cost of living would become the norm once again. The benefits to savers, people on fixed incomes and most productive earners would be enormous.
HOW THE INFLATION SCAM BENEFITS THE ELITES
The answer of course is that a return to sound money would not benefit the powers that be. They are robbing, slowly and deliberately, most of the population by means of inflation. How do they do this? Inflation profits debtors. It reduces the real value of their debt, and of financial assets which are defined in terms of the currency that is constantly losing its value.
People assume that the more powerful folk are savers and owners of currency-denominated assets, and the poorer folk are the debtors with few currency-denominated assets. Surely the elites would therefore not welcome inflation? But in fact, the powers that be are disproportionately debtors. They do welcome inflation. It is small savers and employees who suffer when the powerful create inflation in order to help themselves to their purchasing power.
The biggest debtor is government. States love to borrow money to pay for expanding their control of society. But they don’t want to repay their debts - not if it means returning the same value or purchasing power to their creditors. If money were gold, politicians could not have expanded their borrowing, and with it the parasitic modern state, as they have done. Indeed, if gold became money again, governments would be forced to cut back their activities. Since government activities destroy value and impoverish producers, spending cut backs would be yet another benefit of sound money.
The biggest value-destroying enterprise of government is war. States, and the elites controlling them, like war. War has been described as ‘the health of the state’. It enables more compliance, lives and resources to be extracted from society. For society at large it is of course devastating, impoverishing and soul destroying. But what does the state care of that? It is simply irrational to expect people, especially the kind of people who want to run a state, to pass up opportunities to rob and bully their tax sheep.
All you need to do is to deceive the little people into believing they are under threat of attack. They practically never are. Yet the lie works very often. That’s why ‘they’ are pretending that Russia is interested in occupying the bankrupt, decapitalised, welfare-dependent territories of the EU. At least, this time, many recognise this is nonsense.
In any case, England severed the link with gold in 1914 to fight WWI, as it had during the wars against France after 1793. If Britain had stayed with gold, WWI would have ended much earlier. This would obviously be a very good thing. Sound money is an antidote to war, but only if the state cannot worm out of sound money when war looms. With gold the banking system couldn’t have created nearly unlimited credit to fund total war. Attempting to pay the cost of war through taxation would have been impossible.
Big politically-connected corporations also benefit from inflation, as they do from regulatory provisions which protect their businesses from competition, at the expense of consumers, naturally. Inflation reduces the real burden of repaying corporate debt. Less obviously, inflation enables wealth transfer from small business to large via the Cantillon effect.
What is the Cantillon effect? Let’s pretend that instead of being good at what they do, big businesses have an alternative route to acquiring wealth. In fact, they do so long as there is unsound money and therefore inflation. It’s called the Cantillon effect after 18th century economist Richard Cantillon. He explained that people who have privileged, early access to newly created credit money can buy up assets cheaply. Such people know that credit money will go down in value, pushing prices of their assets up. All they need do is buy and wait.
For example, let’s say a company decides to buy one previously independent business of a certain kind in every major town in Britain. A big loan of, say, £1billion is readily available from banks. Banks are only too delighted to make such a large loan. They don’t want the hassle of lending the same overall amount to hundreds of local businesses. The company buys £1 billion worth of such businesses. It knows that after a certain time inflation will double asset prices. Their assets will therefore be valued at £2 billion in devalued money.
The company need be no better at running its businesses than the previous owners. No actual economic value need be created. In due course the company’s businesses will be valued at £2 billion regardless. This is just of course merely the original £1 billion doubled by inflation. No one has created anything new. But the bank loan is still only £1 billion. The company’s owners’ net worth has increased from nothing to £1 billion (£2bn assets - £1bn debt). The owners have become very wealthy ‘cantillionaires’, despite creating no value for society at all. They naturally support more inflationary, predatory elite wealth transfer schemes.
It is worth considering what would happen in a free society with, by definition, sound money and therefore steadily falling costs of living. The same company could lay out £1 billion to buy the same businesses. But this time, its businesses will always be worth no more than their original £1 billion purchase cost, at best. The company’s owners will have nothing to show for their activities. There is no unearned £1 billion windfall. The only way to prosperity for them would be to add value by creating better products at lower prices. Which is exactly what businessmen are supposed to be doing.
We can see how governments and corporate interests benefit from steady price inflation, that is to say from causing a steady, deliberate loss in the purchasing power of money, by severing the link to gold. But what about the banking sector itself? Surely it doesn’t want to see the value of the loans it has made reduced by inflation.
There are a number of reasons for banks to welcome inflation. Firstly, the value of most of their liabilities, other people’s bank accounts, also go down with inflation. Secondly, the profit from creating new loans for literally no expense and collecting interest payments on them is enormous. And it is risk free. If a bank overdoes its lending a bit, the state central bank will simply create still more credit money to bail it out.
Meanwhile there is steady increase in the size of the essentially parasitic financial community as the ratio of loans to economic activity constantly increases. In an inflationary environment, i.e. one where the state has suppressed the use of real money, generally gold, the financial sector, and the state itself, become huge. State and ‘private sector’ indebtedness is much greater in the West than it used to be. At some point the mushrooming pile of debt becomes unstable, putting governments and banks into debt traps from which the only, temporary, escape is accelerating more money creation.
IT ALWAYS ENDS IN TEARS
What I have been describing is the way in which abandoning sound money, typically by severing a legal link with gold or silver, leads to a steady fall in the value of so-called money. This is really FIAT currency, which means money whose value depends solely on public faith in the competence, credibility and honesty of governments.
Here’s the thing. This has happened before, many times. China was the pioneer, as far as I am aware. The Mongol regime there resorted to printing masses of paper money in the late medieval period. It lasted for some time. But the moment came when a slow decline in its purchasing power gave to way to a total lack of trust. It became worthless. The Chinese overthrew the Mongols and re-instituted the link to silver money.
Subsequent episodes of paper money have generally resulted in currencies becoming worthless. The most one can say is that less developed countries in Latin American and elsewhere have used paper currencies consistently in the nineteenth and twentieth centuries. But the elites always had access to sound money, pounds and then dollars which retained a gold link until more recently, while the population simply remained poor.
But now there are no currencies which are anchored to anything of value. We are living in a worldwide experiment trying to prove that this time it’s different. This time, FIAT or paper money will somehow avoid total loss of value and state bankruptcy. The omens are not good, human nature and the rapacity of the powerful being what they are.
In a sound money society, in contrast, there might be little or no net creation of new loans from one year to the next. And the excitement of creating loans could well be mitigated by the rigours of unlimited liability for incautious bankers. The banking sector would be small and suitably cautious. All in all, rather boring, for bankers. But better for everyone else.
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