The Mystery of Inflation

Sun  Mar 2, 2008  12:44 am

My Friends,

Here is another parable elucidating a bit more on the mysteries of money and inflation. I do not claim that all the correspondences are exact but wrote it with the purpose of illustrating several key underlying principles, most importantly the balance and internal integrity needed to create a stable monetary system.

The Mystery of Inflation - A Parable

In the far away land of Anywhere there lived a community of one hundred persons who were all industrious and wanted to build a prosperous society. The trouble was that there was no money in Anywhere so everyone just sat around all day doing nothing, never going to work for there was no money for wages.

The group finally met together to solve the problem and a grand idea was presented. One man said: "Since none of us have any money and no one will work without money let us solve the dilemma by creating our own dollars: Anywhere dollars. Each dollar will be equal to the value of an average person's working hour."

"That sounds pretty good," said another man, "but how much money should we print and how do we distribute it?"

"No problem," said the first man. "Each person here will decide how many dollars worth of production he will do in one year. Then we will print up that many dollars for him. The person will then be obligated to render the committed amount in goods or services. After each person receives his money he can spend it as he pleases. If he does not perform as committed then he will receive fewer dollars the next year. If he performs more he can receive more."

Everyone thought this was a splendid idea and each began making commitments as to the amount of productivity for which he was to be responsible. The average tended to be a forty-hour week or about two thousand hours a year. Thus the average person received two thousand "Anywhere dollars." To satisfy the need of the entire community there were two hundred thousand dollars printed up and distributed to the individuals.

Everyone worked for the committed amount and everyone spent their money. For that year Anywhere was a thriving community and everyone was as busy as they wanted to be.

At the end of the year the town met together again and to their delight they found that the anywhere dollar, was still worth exactly one dollar. Now, however, they had to prepare for another year. Again they called for commitments as to the amount everyone wanted to work for the coming year. This time everyone was more ambitious and the average commitment was for 2100 hours. In addition to this five young people joined the labor force. 105 workers times 2100 hours equals a total of $220,500 Anywhere dollars that would be needed for that year.

The people reasoned among themselves that they did not have enough money in circulation to meet the demand. There was $200,000 printed last year that was still in circulation and they would need $220,500 for this year thus they would need to print up $20,500 to meet the demand. The amount of new money required averaged $195.24 per person. The decision was made to add this money into circulation by paying the new workers and giving extra dollars to those who committed to the extra work.

They did all according to plan and they met with satisfaction at the council meeting next year and found their currency yet stable. A dollar was still worth approximately a dollar.

The next year a few more persons joined the labor force and the appropriate new money was added to general circulation. Correct adjustments were made year after year and all seemed to go well until greed arouse in the eyes of the person in charge of printing the money. He thought to himself, "If I were to print up a few thousand extra dollars for myself I could have the extra money I need and no one would be any the wiser. No one would get hurt and I would greatly benefit."

At a time when here was $300,000 in circulation the man printed up an additional $3000. Everything seemed to go as planned for him. He had lots of extra money to spend and no one seemed to suffer for it.

However, at the yearly council meeting the report indicated that the dollar was no longer worth a dollar but only 99 cents. No one seemed too disturbed. A penny loss over several years did not seem bad. Thus they planned their new fiscal year according to the established pattern.

It did not occur to the people that there was too much money in circulation and someone had stolen one penny from each dollar they owned. Meanwhile, the printer was quite enjoying himself. He liked his new lifestyle and decided to print himself up some additional dollars again. This year, however, he printed up a little extra to help him cope with the inflation that seemed to be affecting money.

The next year the dollar was worth only $0.98.

The following year the printer followed the same procedure and the dollar dropped to $0.97.

Now the people began to become concerned. One spoke up, "If this inflation keeps up the time will come when our dollars will be worth just 50 cents, then 25 cents and finally nothing at all. Something must be done."

The printer became rather nervous and feared an investigation. He decided to present a solution of his own: "My friends, " he said, "The reason we are having a problem is because of greed. I find that people are not doing a dollar's worth of work for a dollar's pay. They always want more, more, and more. Workers are forming unions to increase their pay. Greedy businessmen keep raising their prices. Everyone wants to buy more than they need. Greed is the problem," he shouted. "Good old fashion greed."

The people hung their heads in shame. Each examined his own heart and sure enough he had found some greed there. They were all guilty to some degree they felt. They all made a resolution to be less greedy in the coming year.

Even though the people tried to 'be unselfish the situation became worse each year for the printer created more money for himself.

After several more years the people were becoming alarmed that their inflation rate had increased and the dollar was now worth only $0.80.

The printer felt he had to distract the people's attention away from an investigation, yet gain more control for himself. He presented the community with a master plan.

"No one really knows the full reason behind inflation," he said. "But there are several things that fuel the fire. We are all aware that greed is one of the major problems, but in addition to this we have an unevenness of supply and demand for money. This causes many people to raise their prices temporarily and then when they are up there greed keeps them up. In our greed we also expect something for nothing. Each year we have given to us new money as if it were a gift. Getting money without earning it is a sin that we have to correct. To solve the problem of the distribution of money and the uneven supply I propose that we establish the Community Reserve Board. The Board will add new money to the system by making loans. This way community members will not receive inflationary money, but will earn their money and pay it back, yet in the process will add the new money that we need for the community. The Board will also control the times when the money is added or withdrawn so inflation can be properly curbed. It will also be necessary that we control the prime interest rates to reach our objective. If we sacrifice a little now we can eventually produce a stable economy."

Now the printer being the wealthiest man in the community was greatly admired for his advice and the people put his proposition to a vote. Some strongly opposed the measure, but the majority voted for the Community Reserve Board and its existence became a reality.

Most of the community thought that the board and the profits it made belonged to the community, but this was a deception created by the printer. In reality it belonged to the printer and several family members he had taken into his confidence.

The printer thought it would be important to have a good show for the next financial report so he was careful not to release too much money into the system. When they met and examined the data the people were pleased to note that inflation was actually slowed down a slight degree. It was far from being cured, but the people were happy and satisfied that there was an improvement.

Because of various monetary problems a group of workers went on strike for more money which they evntua11y received. The printer thought this would be a good time to add some extra dollars into circulation. He thus printed up a large amount for him and his associates. At the next financial report it was found that inflation was now worse than ever, but the printer had his defense ready. He blamed the greedy workers who demanded and received more money. This seemed logical to most of the people and again the blame was focussed on greed. Many people thought that things would work out just fine if everyone would stop being greedy and cooperate better with the Community Reserve Board.

The printer found that his strategy worked very well. From that time on he planned his inflationary tactics around apparently greedy causes.

The printer also extended cooperation to the local government and volunteered to loan them whatever money they needed or various community projects. This helped to project the image to the people that his company belonged to the community and not himself.

The government was his best customer for it seemed that the people in the community had an endless string of worthwhile projects they wanted financed. They ranged everywhere from buildings to charitable enterprises. It seemed as if the community debt to the Community Reserve grew larger and larger and never seemed to get less.

The printer was quite proud of himself. He could not only print himself money when needed, but he was now collecting from 5-10 percent interest on loans on all the new money he put in circulation. He now rarely had to print himself up money but could make all he needed from the interest on loans and it was less risky. He was making the loans and collecting the interest on money that was not his and with the consent and blessing of the community. Things seemed to be working out even better for him than he planned.

His only problem was that he was still faced with the complaints of the people over inflation. The heavy consumer borrowing and the government borrowing had led to many new dollars being added to the system each year. The current dollar was worth only $.20 compared to the original.

He now shifted the blame to government spending. He told the people that because the government spent in such excess inflation was beyond his control. Thus did the people then try and control the spending of the government, but the printer did not worry.

He knew that if government spending was brought under control (A thing he did not expect to happen) that he could lower the rate of interest on his loans and introduce inflationary dollars directly to the public or through agents and collect interest on them.

Everything worked fine for the printer until the time came that the dollar collapsed completely through hyperinflation. Even at this crisis he was undaunted. He merely suggested that we create a new monetary system patterned after the old one and start over again. The people of the community who were now all very poor could see no other solution and respected the printed for his hopeful plan in the day of darkness.

They were despondent to the point of placing their confidence in him again when one of their members hailed their attention and said: "My fellow citizens. Several of us have been suspicious of the printer for some time. We have investigated him and have found corruption that defies the imagination. First the Community Reserve Board and all its profits belongs to him and his associates, not to the community. Secondly, the inflation that has plagued us and eventually destroyed us is caused by theft and manipulation of money on his part. Come, let us hold this printer fast and go make a full audit of his premises which should reveal all his undertakings."

The citizens then bound the printer and discovered his records which revealed the truth behind all his manipulations. They were alarmed indeed and chased the printer out of the community into the Badlands where great perils awaited him.

The people then gathered together in an attempt to decide what to do next. The man who had exposed the printer spoke up. "The records reveal that our system worked as planned the first couple years before the printer got greedy and printed excess dollars. Let us start anew as before except we shall not trust our fate to another but take charge ourselves. This time we will make sure that we are aware of all the money introduced and shall have a full audit on a regular bases so any mismanagement can be detected and corrected. We must also make a rule that the government cannot borrow through the printing of inflationary dollars. If the dollars added to circulation equals the increased value of goods and services then we can have perpetual balance as we did in the beginning."

The people decided to try again and moved forward. Many years passed and the community grew and prospered. They had problems develop from time to time but they were not blinded as before and corrected them and replaced unscrupulous workers as soon as they were detected. In their new endeavor people of integrity and industry made sure the needs of the people were served above the desires of the self-serving.

"Stocks have reached what looks like a permanently high plateau."

  -- Irving Fisher, Professor of Economics, Yale University, 1929.

Copyright © 2008 by JJ Dewey, All Rights Reserved