Societies drift to and fro from what may be considered truthful and prosperous ideologies. It’s not uncommon and it is expected. When these hallucinations become widespread, as to be ruinous to the private individual’s wealth, it becomes time to point out the slough into which that aspect of knowledge has sunk. This short article is to apply this sentiment to the term ‘inflation’.
If written correctly, by the end you should see inflation for what it is. The path to that point should be painless and the learning remain permanent.
Inflation [base: inflate] comes from the Latin flare meaning “to blow” or Latin inflare meaning “to blow into”.
In the C18th, economists did not mention the word inflation in their writings. They instead, on currency and prices, spoke of ideas such as money being a commodity, a commodity useful in its own nature and yet still similar in laws to all other commodities:
- “Once money is introduced to a marketplace, each good is exchanged for money, then that money exchanged for other goods. Money becoming the measuring stick of produce.”
- “Money, however, like every other commodity, varies in value”.
- “The discovery of the mines of America reduced, in the C16th, the value of gold and silver in Europe to about 1/3 of what they had been.”1
At this time, C16th, the prices of produce in Europe increased. Labour purchased more money, since the money, being in abundant supply, became cheaper. Thus, the prices of goods and services increased. Yet these prices increased for the producer as well as the consumer. If measured in hours of labour, the prices did not change to the same extent. The major change was that the exchange value of money had altered. This was all understood, analysed and written about at the time.1
The entry to economics of the term ‘inflation’:
During the War of Secession in America there occurred a great expansion of currency and specie backing was temporarily abandoned. This is not unusual in all of history, see below in this article on the Bank of England. Following the war, ending 1865, a specie backing was to be re-installed. America, however, had begun to outstrip London as the larger economy and at the same time, in America, silver was being removed from the money supply:
- 1850: Total Worth: USA £1,686,000,000; United Kingdom £4,500,000,000
- 1882: Total Worth: USA: £9,790,000,000; United Kingdom £8,720,000,0002
These events resulted in a steady yet significant increase in the value of money; gold. Unsurprisingly, the prices of produce in America decreased at this time. Labour purchased less money, as money, being in short supply, became dearer. [cont. as C16th Europe above, in reverse]. This was all understood, analysed and written about at the time.3 This is the period in which ‘inflation’ entered economic language as politicians and economists were seeking ideas to alter the situation.
Both periods here, that of C16th and C19th, are a sound reminder that real wealth is not measured in currency. Real wealth is a man’s safety, his enjoyment of the natural world and of life. It is by his person & his labour that this is afforded and can be monitored. Currency is only a commodity, like any other commodity in life.
A brief detour; definition(s):
By watching dictionary definitions one can see the introduction of the term ‘inflation’ to economics.
- Noah Webster’s Dictionary of 1828 had no association between inflate or inflation and currency or economics.
- By Webster’s 1886 edition, verbatim, we find: “inflate: Definition 3: to become unduly expanded; as, an inflated currency will become depreciated”.
By 1924 the definition of inflation was set, at its first, most rational and truthful definition.
- 1924, Oxford Dictionary; ‘Inflate: 4. abnormally increase (State’s currency esp. by issue of inconvertible paper); 5. bombastic.’
The definition was an increase in the amount of currency. The word inflation is a very near perfect choice to define the phenomenon. Inflate even carried a slightly negative connotation to being artificial and temporary; as in an inflated ego, a balloon, or bombastic.
Our purpose is not to criticise the system today.
It is to first understand and then to find a beneficial way to operate within it.
Alan Greenspan, in 1966, assessed the sentiment shift of 1890-1910, a shift away from systems established on the Principle of Universality, in this way, “[…] if banks can continue to loan money indefinitely, it was claimed, by economic interventionalists, there need never be any slumps in business. And so the Federal Reserve System was organised in 1913.”4
The shift attracted much analysis at the time, both political & economic. John Maynard Keynes in 1920, note well John’s use of the term inflation to mean an expansion of currency, writes:
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. […] 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.”5
In truth, the debauching of currency by inflation had been around for centuries, in near all empires. For example, the Bank of England justified it and applied it thus:
“In times of great stress […] the best of systems tends to give way to emergency measures which cannot be defended on any principle of sound banking.” In times of emergency the BoE made, “the ultimate banking reserves of the nation the basis for a great expansion of credit”.6 What are the reserves of the nation? This is the nations real wealth – resources, intelligence, space, labour, &c.
The Bank of England also knew the panacea and had applied it following all manner of stresses and wars from 1694 to 1913; allow the system to return to normality, be it at a higher price level, and eventually install a specie peg once again. This is what was known as ‘sound banking’ (BoE) or ‘a free banking system’ (Greenspan). Philip the Fair, King of France, communicated the same sentiments in 1295.7
Our system today:
Today we find that an unapologetically interventionalist economic system has replaced what was previously considered a free-er system.
The term ‘inflation’ has come to be used today as ‘price inflation’ and as synonymous with a constructed Consumer Price Index. It should be clear now, that one is unable to assess a change in prices without assessing the change in the very commodity in which those prices are being measured.
What remains the same today? Currency remains today a commodity. The wealth of a nation is still today dependent on its natural resources, the intelligence of its people, its industry, trade and defence, and on the size of the population. Originally defined inflation continues today:
- M3 is a monetary statistic used in most developed and developing nations. M3 provides a measure of the rate at which currency is expanding. In Australia, M3 has run at a 10.7% p.a. over the past 50 years (ie compounding every year). Said another way, in 1966 there were $10.7b AUDs in existence, and in 2016 $1,882.7b AUDs8. A 170-fold increase in 50 years. Consider, how does this fact interact with all other statistics? Have you heard or read about it?
To return to producing wealth as individuals is rather simple, analyse the system accurately and apply our energies accordingly, to create wealth.
A peak at monitoring:
The person and their labour have always been the base statistics in economics from which all else is measured. It is natural for this to be so, as your person and then your labour are the basis of your own life and with them you live out your days.
From the base case of man and his labour, we reach the ideas to monitor, each alone imperfect, yet when combined together and used with current ideas they become most useful:
– Statistics measured using labour hours of the worker, ie. consumer goods, rent, land.
– Per capita statistics of land, produce, water, net worth, or another item as desired.
– Comparative positioning within the supply of money, so as to maintain the comparative purchasing power to all other market participants.
– The use of a universal currency, to which gold is uniquely positioned.
– Finally, as we measure today, societal and other demographic statistics which impact the wealth of the nation remain vital.
These ideas are expanded on here.
As we began the piece, when societal hallucinations become so widespread as to be ruinous to the private individual’s wealth, it becomes a duty to point out the deviation from truth that that aspect of knowledge has made. The term ‘inflation’ is key to understand. The reality of inflation, its nature, should now be viewed through a clear lens.
Our next fundamental, Observing Wealth.
- An inquiry into the nature and causes of the wealth of nations by Adam Smith (1776)
- Triumphant democracy by Andrew Carnegie (1886)
- The New York Times, When will the high cost of living reach its climax by George D. Mumford (February 9, 1913)
- Gold and economic freedom by Alan Greenspan (1966)
- The economic consequences of peace by John M. Keynes (1920)
- English public finance from the revolution of 1688 by Harvey E. Fisk (1920)
- The law of nations by Emer de Vattel, originally published (1758). Liberty Fund Inc., 2008, page 143.
- Reserve Bank of Australia, monetary aggregates. Available from: <rba.gov.au/statistics/>