A Close Look at the Theory of Inflation
By Byron Dale
Let’s assume for the moment that Webster’s definition is correct. If it is, we need to address the issue of how and on what basis did the amount of money and credit increase without there being an increase in the goods and services. This increase in money and credit could not arise due to the need to pay for any existing goods or due to the need for more money or credit to purchase any increase in goods or services.Black’s Law Dictionary defines Credit as: – “Time allowed to the buyer of goods by the seller, in which to make payment for them.” –“The right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.
According to this definition there would need to be an increase in the amount of goods and services coupled with a shortage of money needed to obtain those good or services before there would be any need for credit at all. Almost every one has the lawful authority to create goods or to provide a service. At this time, only banks have the lawful authority to create money. As a general rule the goods are created and the services are rendered before payment is made for the goods and services.Therefore, an increase in money needed only to gain a profit off of money in and of itself, without any ties to an increase in goods, is the only reason and the only way money could be created without there being an increase in goods or services.The only way an increase in the money supply would increase prices would be if almost everything was bought and sold at auctions where the price is determined by the bidding process. Personal observation and experience has shown me that very few buyers offer to pay more than the seller’s asking price.
This fact is proven by the fact that so many things are now sold with the words ‘on sale’ preceding the asking price. This leads the buyers to believe they are buying the goods at less than the regular selling price. The fact that there is a shortage of money to buy all the goods that are for sale is proven by the fact that there are so many ads promising ‘no money down’ and ‘no interest for a certain length of time’ if one will only buy the goods right now.
Many writers use the example of a king taking the metal money he acquires through taxes and other means, then re-coining and debasing it by substituting less valuable metal for the more valuable metal. Therefore, the king is able to issue more coins with the same amount of the more valuable metals, thus inflating the money supply, resulting in increased prices. This only proves that the king believed that he had a shortage of money.
There could only be truth to the idea that the king caused inflation by creating more coins if a person was used to dealing in metal money where it would be possible to recognize that the new coins did not have the same metal composition as the old coins. The seller, upon realizing that he was not receiving as much of the more valuable metal as he was expecting for his goods or services clearly might raise his prices to obtain the same amount of the more valuable metal he was expecting.
Those facts are no longer in play today. We do not use metal money. In fact, we don’t even use paper money. We only use bank-generated numbers as our money. Everyone I know, when given the amount of bank-generated numbers that he’s expecting, is happy with his deal. No one can tell the difference in numbers like they can tell the difference in metals.
Not one person in ten million truly understands how our money system works, the principle under which it functions or how money gets into circulation so people can use it. Even fewer care. I doubt if one man in two million has any idea what the money supply is or whether it has increased or decreased. So, why would people raise or lower there prices due to an increase or a decrease in the money supply when they don’t even know if there’s been an increase or a decrease?
If we were using gold as money it is possible, and in fact likely, that in the area of a gold rush there could be a temporary rise in prices on the goods the gold miners needed. That rise in the prices of goods would only last till people found out it was easier to get the gold by supplying the miners with goods rather than trying to find more gold or when most of the new gold was mined out, harder to find, or already owned by a few.
Webster’s Dictionary also states: Inflationary spiral – a continuous and accelerating rise in the prices of goods and services, primarily due to the interaction of increases in wages and costs.
A continuous and accelerating rise in the price of goods and services is clearly what we are experiencing. The question is, “Why do costs keep increasing?” To answer that question we have to truly understand how our money gets into circulation. Today, all new money goes into circulation as interest-bearing loans. When money is created as interest bearing debt, the debt owed goes up and the interest on that debt always drives up the cost of doing business. When governments borrow, its interest cost increases followed by an increase in taxes. Interest always increases the cost of doing business. Interest also causes the debt to increase but it does not increase the money supply nor does it increase goods or services. Interest on debt also increases the need for an increase in the money supply to pay the added cost of the interest or someone must suffer a loss of money. Additionally, when the principal of a loan is repaid, the money is extinguished causing a decrease in the money supply until someone borrows more money. When money is loaned into circulation at interest, interest is the only cost that can’t be eliminated without stopping the increase in the money supply.
There are only three increases in the cost of doing business that courts will force you to pay: interest, taxes and rent. When one suffers from a rise in interest, taxes or rent they must raise their prices or cut their living standard. When one’s standard of living starts to suffer, most people try to get an increase in wages.
Add greed and growing governmental regulations to interest and taxes and you have the true cause of price inflation. Do you really think that the price of gasoline went up to over $4 a gallon because there was a sudden increase in the money supply? It is clear that when the cost of gasoline went up over $4 a gallon, the price of everything that was shipped had to go up or someone’s profit had to go down. The continuous increase in the nation’s interest bearing debt is the cause of our continuous and accelerating rise in prices.