Updated: Jan 1
I have written about inflation before but I think it is more important than ever to revisit the topic as consumer and retail prices continue to rise at rates not seen since the 1970s, and major workers’ strikes continue to afflict and disrupt the U.K. economy. It was economist Milton Friedman who once said that inflation is always a monetary phenomenon so with that in mind today we will first look at how money came about, what money is, and what the government has done to money or how the government has corrupted it. My hope is that after you have read this you will better understand why as banker Felix Somary once said: “the state alone is responsible for inflation: inflation without government, or indeed against the government, is impossible.
The question of what money is never seems to result in a straightforward answer but we can go back in time and perform what Ludwig von Mises, a classical economist from Austria, called a regression theorem. In plain English, it just means going back in time to see how money evolved to understand the nature of money and what it is. So if we go back to primitive human society there was little exchange of goods or services as humans were hunters and gatherers were trying to survive in family groups and so there wasn’t much contact with other families or groups and no need to exchange much. Eventually, as humans got together as tribes, people started communicating more and through barter, they would trade valuable commodities and goods. The problem with barter was that it was difficult to match goods and commodities between the parties involved. So through time, people found that some commodities like cows, shells, stones, precious metals, and others were almost always desired by most people. What von Mises called the most marketable commodity then became money.
Historically gold, silver, and copper have been accepted as money for about three thousand years and the reason for it was that these were commodities or goods that almost 99% of the people desired so they facilitated indirect exchange and also led to members of society being able to specialize in different economic activities as people did not have to depend on subsistence for their survival. With money came the development of towns, cities, nations, and empires, and trade flourished. What I think we should take from the evolution of money as the most marketable commodity is that it replaced barter and when you barter you need to have something of value to exchange. So I would say that it should be the same with money, it not only has to have value at the point of transaction but should also maintain its value over time.
So how have governments hijacked money and currency? I would say this happened back in antiquity too as the Greeks and Romans realized that the state needed to guarantee the soundness of the gold, silver, and copper coins as a way to expand trade, pay for wars of conquest, and increases the size of their empires. Giving the state the monopoly on issuing the coin is a double-edged sword as it also gives the state a lot of power and as Lord Acton once said: “Power corrupts and absolute power corrupts absolutely.” In the beginning, the Roman silver denarius was sound and helped Rome become arguably one of the greatest empires ever seen but from around the middle second century A.D., Rome started abusing its power by debasing the denarius which meant that they lowered the content of the coin while maintaining the same face value. This is how the Romans inflated as there were no Central Banks or government debt back then. Eventually, people noticed the coins were losing their silver content so they demanded more denarius for goods and services. Does that sound familiar? It should be because that is what inflation really is. Why did the Romans do this? Well because the power went to their heads and maintaining a massive empire costs so they resorted to currency debasement or if you want to be more blunt cheating or inflating. By the time of the collapse of Rome in 476 A.D., the coins had no more silver.
We could argue that the same process has been occurring in Britain. Before World War One Britannia still ruled the waves and the sun never set for the British Empire as its colonies were dotted in the four corners of the planet. Britain had also been on a gold standard since 1717 and the pound was as good as a gold sovereign and the sterling coinage had a constant silver content of 92.5 percent. Whatever one might think of the Victorian Age and pre-1914 Britain one has to say that sound money or a currency that was not inflated led to Britain becoming an industrial and commercial powerhouse.
So what happened to the pound? Well like the Romans the British Empire may be stretched itself and wars, aside from the terrible human toll, cost a lot of money so by 1947 the pound was not as good as the gold sovereign anymore and the sterling coinage was stripped of all its silver. So with no sound money governments have been able to issue paper currency ad infinitum with the help of the Bank of England. With the collapse of the Empire, the focus was on increasing the size of the state at home with the socialist ideal of helping everyone get by from cradle to grave. It is understandable that this kind of thinking flourished after the sacrifices of the British people fighting two major wars in thirty years. Politicians have adapted from the Victorian Age where sound money kept the state’s expenditures below 10 percent of GDP to the Age of Inflation in which today’s state spends more than 50 percent of the economy and takes in the most tax in seventy years.
So when you next read or listen to the news and you are told that Brexit, greedy corporations, the price of food, the price of foreign holidays, trade unions, NHS nurses, or foreign leaders are causing inflation hopefully you will not be fooled. As Felix Somary once said: “inflation without government is impossible”. So what is the solution? I would say it is up to us to elect politicians that would like to slash the size of the state and go back to a sound money footing.
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