THE RAVAGES OF INFLATION
Its officials within it are like wolves tearing
the prey, shedding blood, destroying lives to get dishonest gain.
Its prophets have smeared whitewash on their behalf, seeing false
visions and divining lies for them... The people of the land have
practiced extortion and committed robbery; they have oppressed
the poor and needy.
Ezekiel 23, verses 27-29
"In the course of that enquiry I soon saw that prices were raised by paper money, and that the rise of prices was an evil... [O]n seeing in an advertisement a pamphlet bearing for its title "The Iniquity of Banking", I was curious to observe the train of reflection that had been brought forward by another on the same side. ...Mr. Fox [the author] is made to speak of the "increase in the amount of circulating medium" as what "must, of necessity, have greatly depreciated the value of money"... The system of the Bank of England is there accused of being a bubble, and as being "in every respect as great an imposition, and resting upon as sandy a foundation" as "the South-Sea Bubble"... [T]he country bankers... their mode of traffick produced the joint effect of oppression, fabrication of counterfeit, and robbery... "depriving the labourer of a part of his wages"... the bankers, by issuing their notes, have as effectually robbed him of one third of his wages, as if they had put their hands into his pockets and stolen it...
Mr. Fox, in speaking of the astonishing increase of the circulating medium as having of necessity greatly depreciated the value of money, speaks of the vast addition of our national debt as the cause, or at least a cause... [T]he mere idea... that the... rise of prices has the unrestricted issue of paper money for one of its causes, or even for its principal cause... is an idea that has been long ago stated and from quarters too numerous to be counted..."
I consider the country bankers... as a set of men who, without the smallest particle of guilt, have for such a length of years been levying for their own benefit a tax upon a great part of the community, and upon that part of all others which is least able to endure such pressure - the aged, the infirm, the fatherless, and the widow...
I consider them... as usurpers in effect of another attribute of sovereignty - the right of coining money, in practising on a vast scale, and with perfect impunity and security, and even universal respect and applause, that sort of act [forgery, even high treason] which produces to the actors a profit, and to the rest of the community a loss...
...The value of money is now no more than half what it was 40 years ago..."
Jeremy Bentham, 1801
The reason John Adams, Thomas Jefferson, Andrew Jackson, and Abraham Lincoln understood money, banking, and inflation, is that at that time the bankers of the world essentially used the same methods they now use - and there were people like "Mr. Fox" (the author of the pamphlet Bentham came across) who understood what the bankers did, and wrote the same kind of thing you now read in this report. Two hundred years ago, John Adams, Thomas Jefferson, Andrew Jackson, Abraham Lincoln, and Jeremy Bentham had a better understanding of inflation than practically all "modern economists."
Let us attempt to throw some light on this phenomenon many regard as a "disease" that "afflicts" the economy of a country, a "disease" we need to "fight" a "war" against, a "disease" for which we need to find a "cure."
WHAT IS INFLATION?
To avoid confusion I shall use the terms "currency inflation" and "price inflation." By "currency inflation" I mean any increase in the quantity of the currency supply. Under "currency supply" I include all money, fiat money, bank deposits, checks, drafts, etc. in circulation - whatever is used generally as currency. By "price inflation" I refer to an increase in the general level of prices.
One of the most basic economic principles is that prices are determined by supply and demand. Increase the demand for an item, and its price rises. Increase the supply of an item, and its price falls. Reduce the supply of an item, and its price rises.
In the case of currency a parallel principle applies: Increase the supply of currency, and its unit value falls; reduce the supply of currency and its unit value rises.
Look at it from another angle. Picture the total quantity of currency. Imagine that this adds up to $1,000,000. Now picture the total quantity of goods and services that can be bought. Imagine that the total quantity of goods and services can be subdivided into 10,000 equal units. The price of each unit will be $100. Now imagine that the total quantity of currency is increased to $2,000,000. What is the price of each unit of goods and services? Answer: $200. A 100% inflation of the currency supply brings about a 100% price inflation.
Inflation is not something which just happens. It is something that humans do. An increase in the supply of currency occurs because someone "manufactures" more currency. So currency inflation is a human action. When prices increase it is because someone raised them. So price inflation is also a human action. Is there a causative link between the two? In their book Free to Choose, Milton and Rose Friedman include a chapter called "The Cure for Inflation." They show five charts which compare the "quantity of money per unit of output" to the "consumer price index" for the U.S., Germany, Japan, U.K., and Brazil for the period 1964-1977. The lines on the charts are virtually parallel. They demonstrate in practice, over a thirteen year period, in five countries, exactly the simple relationship implied by the previous paragraph: Double the currency supply and you double the price. See the U.S. chart, Figure 11, below.
The five Friedman charts establish the causative link between currency inflation and price inflation. But I have unjustifiably jumped to a conclusion. An alternative conclusion: Double the price and you double the currency supply. So which causes which? The Friedmans show a sixth chart which demonstrates that price inflation follows currency inflation by about two years. This seems to indicate that currency inflation causes price inflation.
If you can understand the above reasoning and calculations, you will be a hundred years ahead of most "modern economists," including most university professors and Nobel Prize winners!
INFLATION AND SMOKING
Smoking is a human action. People smoke because it feels good to them. But in the long term smokers start coughing, feeling bad, and even dying from lung cancer. The good consequences appear immediately. The bad consequences may take years to manifest.
If a smoker tries to stop, some bad consequences called withdrawal symptoms appear immediately. It may take two to three months for the good consequences to become noticeable.
This is why it is so difficult to stop smoking. Simplistically speaking it is easy to say, "the cure for smoking is to stop smoking." In practice it is not that easy.
So too, with inflation. When the additional currency is pumped into the system, the fortunate recipients of the new currency go on a spending spree, the stock market goes up, new economic activity is stimulated, people become more enthusiastic, and new jobs are created. The good consequences appear immediately. But two years later prices go up, consumers complain, and politicians talk about "fighting inflation." The bad consequences appear much later the Fed tightens the screws, and the economy becomes "depressed."
It is easy to say, "the cure for inflation is to stop inflating." But if currency inflation is stopped, the stock market immediately tumbles, interest rates go up, "money" becomes tight, companies go bankrupt, people lose their jobs, and the economy becomes "depressed."
We are addicted to inflation like the compulsive smoker to nicotine and the alcoholic to alcohol.
INFLATION IS A HIDDEN TAX
Let us return to our example of a total quantity of currency of $1,000,000, and a total quantity of goods and services subdivided into 10,000 equal units, so the price of each unit is $100. Suppose you have $200 in your pocket. This enables you to buy two units of goods and services. Now imagine that the currency supply is increased to $2,000,000. The price of each unit goes up to $200. With the $200 in your pocket you can now only buy one unit of goods and services. Effectively, half of your $200 has been "taxed" away - one of your two units has been stolen. The people who stole half of the value of your $200 are the issuers of the currency and the people who first get to spend the new currency. You are the loser. The winners are the bankers, the politicians, and the bureaucrats.
The bankers and politicians have set up the system so they can effectively steal "money" out of your pocket without even coming near you. By printing extra currency, the bankers and politicians can buy the unit they stole from you. Their cost is paper and ink.
Currency inflation is sophisticated robbery. It is economic rape. In the long run, it is also national economic suicide. In 1920 John Maynard Keynes wrote:
"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
THE NATIONAL DEBT AND INFLATION
The basic mechanism whereby currency is created is based on government debt. When the government needs extra currency, beyond what it collects in taxes, it issues interest-bearing IOUs called government bonds. These bonds are exchanged with the Federal Reserve for currency (Federal Reserve Notes), which the government previously printed for the Federal Reserve. This process is called "monetizing the debt." And this is why we talk about a "debt-currency" system.
The owners of the Fed obviously love the system! They receive the interest on the debt, which now amounts to over $290,000,000,000 a year - that is two hundred and ninety billion dollars! All they have to do for this is print pieces of paper and make bookkeeping entries!
Obviously the perpetrators of this gigantic fraud want the national debt to be as large as possible. The bigger the national debt, the more interest they "draw" - "embezzle" is probably a better word! This is why Bentham's "Mr. Fox" identified the national debt as a cause of currency inflation - the Bank of England has been perpetrating the same fraud much longer than the Fed.
U.S. INFLATION HISTORY
Now look at Figure 12 below. (Figure 12 is largely based on a similar chart in The Biggest Con: How the Government is Fleecing You by Irwin A. Schiff.) It is a chart of the "consumer price index" from 1790 to the present. The index is represented by the solid squares. The index represents the "average price level." It is a sophisticated version of the "$100 unit price" of the above example. A $100 unit price in our example is equivalent to a consumer price index of 100; a $200 unit price is equivalent to an index of 200.
Figure 12 has one scale on the left and another on the right. The left-hand scale uses the "average price level" of 1967 as a "base" of one hundred. This is like saying that in 1967 our "unit price" was $100. Around 1977 the index reached 200, meaning that on average prices had doubled between 1967 and 1977. (Over a period of ten years the bankers and politicians stole half of the value of all cash savings in America.)
In 1983 the government changed to the right-hand scale. By 1983 the 1967-based index had gone up to 300. (Over a period of sixteen years the bankers and politicians stole two-thirds of the value of all cash savings in America.) Periodically, when the index gets "too big," the government starts with a new base. This they did in 1983. Effectively, they divided the 1967-based index by three, giving us the right-hand scale. Currently the consumer price index is about 140. This doesn't look as bad as 420!
Next, look at the straight broken line (normal price trend) from 1790 to 1913. Notice that it is a slight downtrend. This means that on average prices declined slowly during this period. With stable, honest money prices gradually decline. The reason for this is that people become more productive, technology improves, and in general we find ways to produce more from less. Had there been no wars, the consumer price index from 1790 to 1913 would have been very close to a gradually declining straight line. During war the currency supply is inflated to pay for war expenditures. After the war the debts incurred are paid off and the currency supply deflated. At least, this is what happened before 1913.
Now look at the straight broken line from 1913 to the present (inflationary price trend caused by Federal Reserve). A fundamental change occurred in 1913: the Federal Reserve System was established. Notice that after World War I their was some price deflation, but after World War II there was only a slowing down of price inflation. Also notice that between 1913 and 1970 price inflation was relatively low. We could call this "stage 1" inflation. Since 1970 the rate of price inflation has been much higher - "stage 2" inflation. The final stage, or "stage 3" inflation is called hyperinflation. That is where the currency, within a year or less, loses all its remaining value and becomes worthless.
This pattern of inflation, including stage 3, has been repeated many times in history. The Romans did it. The Chinese did it. The French did it. The Confederacy did it. The Germans did it. The South Americans did it and are still doing it. Currently, most countries in the world are doing either stage 1 or stage 2 inflation. Harry Figgie, founder of the Action Group to Save America's Economy has projected that we will enter stage 3 around 1995.
WHO INFLATES THE CURRENCY SUPPLY?
By now it should be abundantly clear that it is the Federal Reserve bankers, aided by politicians and bureaucrats, who inflate the currency supply.
WHY DO THEY INFLATE THE CURRENCY SUPPLY?
If instead of working for your money, you could simply print it, would you slave your guts out for a few bucks?
CONSEQUENCES OF CURRENCY INFLATION
"When the currency expands, the loaf contracts."
Democratic Party campaign slogan, 1836
"...[Of] all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money."
"The purpose of inflation, as it has been throughout history, is to transfer capital from some persons to others. ...But no money manipulator in the course of history had the totally free hand which monetary authorities enjoy today.
...To better understand how the system works... consider the creation of the Bank of England. In the late seventeenth century, a big-time banker named William Paterson had a bright idea. He figured out how he could obtain a 139-percent return on his money each year. His method was simplicity itself. He collected seventy-two thousand pounds in gold and silver coin, almost all of it borrowed, and formed a bank to print paper money receipts for 16 2/3 times the value of his coin. He immediately lent the funny money - £1,200,000 - to the King of England, who used it to finance a war. Since the king paid an interest of 8.3 percent, Paterson received £100,000 annually in interest on an actual capital of £72,000. It was a great deal for Paterson, and the king did not complain. But it wasn't so great for everyone else. Since Paterson actually had only six percent as much gold as he needed to redeem his notes, he was clearly defrauding the taxpayers, whom the king obligated to retire Paterson's inflationary loan. When people started grumbling, the king simply granted Paterson a monopoly privilege to print paper money. Thus the Bank of England was established, and along with it, a principle that inflationists have clung to ever since: the best way to bring paper money into circulation is to finance government deficits."
James Dale Davidson,
Chairman of the National Taxpayers Union, 1980
THE PROSPECT OF HYPERINFLATION
Harry E, Figgie, Jr., Chairman and CEO of Figgie International Inc. and founder of the Action Group to Save America's Economy, gave a lecture to the League of Women Voters in Cleveland Ohio on July 26, 1990, from which the following is extracted:
"I am here today because I fully believe that this great country is heading into serious trouble, because of the government's dangerous inability to reduce its debt or control ongoing budget deficits.
I became involved in this issue quite by accident in 1982, when Peter Grace made me co-chairman of the President's Private Sector Survey on Cost Control - the Grace Commission. And as a result of that, I became privy to some information that showed me how threatening our government's spending policies are.
This past Tuesday, I met with several congressmen on the subject, including Congressman Dennis Eckhart from Cleveland and Congressman Dick Armey from Texas. I showed six different congressmen the debt and deficit projections, and every one of them said, "Gee, I didn't know it was that bad. I didn't realize where we were headed." They had no idea that the ball game's going to be over in 1995...
I want to put this massive problem into the context of the person in the street, and show you why the government is headed into real trouble. Let's say you have a net take-home pay of $1,000, and you take $100 of that $1,000 and put it into some kind of pension plan, like a Keogh or an IRA... The other $900 just makes ends meet. Now suppose somebody gives you free credit cards... But you realize you can't use these credit cards.
Then, all of a sudden, you meet a very tall man, with a long white beard, a big stovepipe hat, red and white striped pants, and a blue coat with stars all over it. And he says, "My name is Sam - Uncle Sam. I am a financial advisor. I want you to follow my advice. I want you to use your credit cards. When they bill you, just send them a 30-year IOU at 8 percent interest."
And you say, "Yeah, but I have to pay the interest, even if they accept the IOUs."
Sam says, "Do you remember that $100 you were putting in a pension? Take that hundred bucks and use that to pay the interest, and put an IOU in your pension. Twenty years from now, you'll have 20 years of IOUs, but what do you care?"
And you remind him, "Uncle Sam, there's a difference between you and me. You have a printing press in your basement which gives you unlimited credit, but I'm going to go to jail if I do that."
That's why Americans are concerned. Because they know we can't keep going on like this.
...[L]et me explain the difference between deficit and debt... The deficit is the shortfall we have in any one year. If you take in $100 billion and spend $110 billion, you get a deficit of $10 billion. Now at the end of that year, you've got to do something with that $10 billion you owe, so you move it over to your long-term shortfall - and that becomes your debt.
In '82, the annual deficit was $128 billion, up from $4 billion in 1974. The debt in '82 was at $1 trillion, up from $484 billion in '74. But it had taken us 200 years from the start of the republic until 1974 to create that debt of $484 billion. We had gone through World War I, World War II, the Korean War, Vietnam - and we still had a very manageable situation.
Since 1982, when the debt fist hit a trillion dollars, it has tripled - it is now $3 trillion.
Now when Peter Grace called me and a number of others down to Washington in '82, we were commissioned by President Reagan to find some savings in government. And I can tell you, it was like shooting fish in a rain barrel. We contributed $77 million in corporate money and about 500 employees, and found over $424 billion in savings in about nine months. We could easily have identified over a trillion, but Reagan wasn't interested in going further.
Of the $424 billion we identified, Congress instituted $152 billion in savings by 1986. Spread annually, that averages to $38 billion in savings a year. And at the same time, President Reagan pushed through a $50 billion tax increase. Now you take the $50 billion of new revenue and the $38 billion we saved, that's $88 billion that should have gone to reduce the deficit, which at that time was $128 billion. So we should have dropped the annual deficit to $40 billion. Instead of that, the government says we ran a $152 billion deficit last year.
The problem is, in the last 10 years, government revenue has risen at 8 percent a year, compounded, but expenditures have gone up 11 percent. That doesn't sound like too much, but let me put in perspective. Right now Congress has 116 percent more money to spend than they had 10 years ago. But they have spent 186 percent more than they spent 10 years ago. Every time you give them $1.00, they're spending between $1.58 and $1.68. And I'll tell you what I learned in Washington, they not only don't understand this problem, they don't care about it...
The thing that finally brought me up short and has ruined my last eight years were the projections Peter [Grace] got from his economist... verified... by the Citizens Against Government Waste - so, they are current. We were at $1 trillion in debt in 1982. That debt is going to go to $13 trillion in the year 2000. And we were at an annual deficit of $128 billion, and the deficit is going to go to $2 trillion.
...[W]hen we hit the $500 billion deficit... in 1995... we have lost our ability to control our economy by taxation. And we run the risk of... hyperinflation.
Back in '82, I said, "Well, we have some time and nobody's going to be this stupid. We're going to get people to understand this thing." And I'm sorry to tell you that as I stand here in 1990, we're somewhere between 1990 and 1993 in our deficit projections, a little ahead of target. I was with Senator Robert Dole the other day - he'd just come from the White House budget negotiations - and he said, "We didn't make any progress again today, but we will."
Now you've all heard about Gramm-Rudman. It used to be Gramm, Rudman and Hollings, but Senator Hollings said he wanted a divorce from the bill because it was such a travesty. Gramm-Rudman originally said we would have a zero deficit in 1991, but revised that to $60 to $65 billion a couple years later. The reason Congress runs around like chickens with their heads off right now is, technically - unless they get a budget agreement - they have to cut $100 billion out of the budget this year, because they're at $168 billion.
The thing I want to tell you is that the $168 billion you hear is a travesty - a lie foisted on the American people. [Emphasis added.]
Remember all those IOUs that you were peeling out to your pension fund and your credit card fees? Government doesn't count those as part of the cash deficit. We have, for six years, run an actual deficit in the U.S. government of over $250 billion, and this year we're running between $360 and $435 billion.
Let me explain that to you. Start with the Gramm-Rudman bill. That's $168 billion. Now, remember the credit card example, when you took $100 away from the Keogh or the IRA and you sent them an IOU? The government is doing that to nine trust funds, including Social Security, military pensions, railway pensions, and postal pensions. Uncle Sam is taking $120 billion in trust fund surpluses and replacing that with IOUs. Instead of funding them with cash, they're funding them with federal deficit. They don't count those IOUs or the interest on them. And when those IOUs start coming due, the government is going to owe trillions to Social Security, which will be supporting more retirees with fewer workers. [Emphasis added]
So that's the first thing that's been foisted off on the people. The S&L crisis is another. Mosbacher, our country's head economist, made very sure when Bush stuck his neck out on the savings and loan crisis that those costs were taken off the deficit. Current estimates are that the S&Ls will cost us $500 billion overall, and $100 billion next year. There's another $100 billion that's not being counted.
So the deficit has gone from $168 billion to $388 billion, and I haven't talked to you about the student loan problem... the $300 to $500 billion toxic waste cleanup that's going to come from our military bases... crack babies or AIDS or any new programs Congress is talking about.
So we're running, right now, a true deficit of between $300 and $500 billion. And my estimate is that at $500 billion, we lose our capability to control that by taxation. Now don't ever think for a minute that Congress doesn't want inflation, because they know the only way they can pay off the debt is with inflated dollars...
What our charts show is that in '95 we're not going to be able to control our deficit and our debt by taxation, and we're going to move to what's called hyperinflation...
To find out about hyperinflation, we looked at all the countries in the world... We picked Argentina, Brazil and Bolivia as the best examples.
Now the problem I run into when I talk to people about this is that they say, "Oh, you studied the Banana Republic." And I have two parts to my answer. The first is, "Welcome to the United States Banana Republic." And the second answer, and most people don't know this, is that in 1938, the fifth largest market in the world was the country of Argentina. It was very sophisticated, very well run, and very knowledgeable. It had excellent agriculture, excellent manufacturing, and resources. They are now the world's 78th largest market. So, if you think it can't happen in the United States, it can. It happened in Argentina.
For our study, we were very fortunate because we were able to meet with 80 top businessmen..., government officials, bankers, financial executives. Dr. Gerry Swanson, an economist from the University of Arizona, led the team... They took four trips over a two-year period.
...[A]ll 80 of these businessmen said to us, "What's wrong with the United States? You are on exactly the same course that we were on, but about 20 to 30 years behind us."
They said, "Everything that we did wrong, you are doing wrong. For example, you have large deficits. You have a deterioration in your balance of payments. You have eroded the confidence in your currency. You have a tendency to blame outsiders and call for protectionism. And finally, the exchange value of your currency is falling." Twice since the mid-'70s we've devalued our currency and there's pressure now to devalue again.
They said, "All five factors are in place, and the United States is following the path to hyperinflation. We can't understand why you can't see it coming."
When Gerry came back from his last trip, I said, "Gerry, give me a synopsis." He said, "Well, for years in my economic courses at the University of Arizona, I've been teaching that deficits cause inflation." Then he said, "They do. I just saw it in three countries."
I said, "Okay, tell me about hyperinflation. How much time do you have before hyperinflation sets in?" He said, "In Brazil, it set in in three days." Three days.
Now, the terrible thing about hyperinflation is once it gets started, you can't stop it... During the time we were studying this, Argentina's inflation hit 5,000 percent, Brazil's got to 5,000 percent, and Bolivia's got to 25,000 percent with bursts up to 50,000.
Let me tell you how bad that is. We have a book here that we published on how to survive hyperinflation if you're a businessman. We have a picture of a guy with a huge bag going into a bank in Bolivia. At the bank they simply weighed it, and they gave him a note of exchange. Now the terrible thing about that is nobody looked in the bag. They didn't care whether he had newspapers in there, old socks, $1,000 bills, $10,000 bills or dollar bills. They didn't care what it was, it was so worthless. That is what happens in hyperinflation.
So to say that this can't happen here is wrong. I hear the argument periodically that the reason it won't happen to us is that our deficit is only 5 percent of our gross national product. The Brazilian and Argentine deficits are only 8 percent of their gross national products. It's not a huge jump from 5 to 8 percent. So when these economists give you the garbage that our deficit is only a few percentage points of the gross national product, it doesn't mean a thing...
For eight years, I've been ready to beat my head against Congress, but it wasn't until we got to this so-called "budget crisis" that I could even get in to see these congressmen...
If Argentina can go from fifth to 78th because of this kind of deficit problem, we can go from first to 50th, very, very easily. You hear people jumping on us over becoming a second-rate power, and here I'm talking about a third-rate power in the United States...
But, I guarantee you, if this hits... your savings, your bonds, your insurance, your pension - you might as well use them for tissue, because they aren't going to be good for anything else..."