John Woodward 

Australian Federation Party candidate for Wide Bay

Inflation

What is Inflation?

Inflation is the depreciation of the value of money. It is experienced by individuals and businesses as an increase in the price of goods and services. Inflation is said to be 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.

Economists’ Explanation

The standard economists explanation is “too much money chasing too few goods.” This explanation leaves a lot to be desired. Certainly inflation may occur when there is a shortage of one or more major items (such as food, oil, etc.). It is however doubtful if a shortage of bananas would be sufficient as one can always eat apples. It can not however be said that this inflation is caused by too much money. The too few goods side of the equation does not hold water (except in the case of particular shortages) due to the fact that industry today has virtually unlimited productive capacity.

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.

Whatever the immediate cause of inflation, the nature of the money involved is irrelevant. A dollar has the same buying power at any given moment, whether it was created as a dollar coin in the Australian Mint or as a computer entry as part of a bank loan.

No Control Over the Money Supply

During the 1970s, Australia experienced double figure inflation which exacerbated industrial unrest as people agitated to get pay rises to maintain their living standards. Australian governments use this experience to justify making the control of inflation a central part of their management of the economy.

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 with no direct control over the money supply side of the inflation equation.

The only marginal influence that the government has over inflation is through appointing the members of the Reserve Bank Board. The Board in turn attempts to control the level of borrowing and therefore the amount of money created by the banks by raising or lowering interest rates. 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. Inflation is only controlled when businesses start going bankrupt and when householders get their homes repossessed.

Of course members of the Reserve Bank Board are often businessmen who depend upon good relations with the private banks for their business survival. It’s a bit like Scott Morrison or Josh Frydenberg saying:- “Don’t worry about the chickens, we’ve left the fox in charge.”

Inherently Inflationary

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 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 on and on it goes.

The nature of money created as an interest-bearing debt is thus inherently inflationary. It is insidious and unstoppable year on year, underlying whatever other inflationary pressures there might also be within the economy, for example from oil or bannana price rises.

Inflation-Free Money

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.

Non-interest bearing money would need to be created by the government. 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 only cash. It could easily be created as a sum in an account with a government owned bank (e.g. the “People’s Bank“), and spent upon public works, government services and social security payments.

Of course, care would need to be exercised so that neither too much nor too little money was created in this fashion. Strict controls would need to be placed upon lending by the private banks. The aim would be to achieve that level of money supply which provides a healthy balance between the needs of consumers and the productive capacity of the economy.

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“All that is necessary for the triumph of evil is that good people do nothing.”

Edmund Burke.

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