The Unsound Theory of Inflation

Posted Mar 19, 2018 by Martin Armstrong

QUESTION: You defend central banks yet the Rothschilds when clearly Mayer Amschel Bauer Rothschild said: “Give me control of a nation’s money and I care not who makes it’s laws.”  Any comment?

SL

ANSWER: No problem. He never said any such thing it was completely made up. It was attributed to him in 1838 when he was already dead for 26 years. Besides that, what is very clear is that this is based on the assumption that money is fiat. The USA began to issue paper money in 1861. During the period that Mayer lived, the money supply was primarily coined.  The only plausible reference would be implied that he debased them. He was a banker and never produced the coinage.

It would be nice just for once that you bothered to actually understand the role of central banks as originally set forth. What they do today with Quantitative Easing has proven that the entire theory of an increase in money supply will be inflationary is outright BOGUS.

In every case of HYPERINFLATION, not even once did inflation ever begin by increasing the money supply. Inflation begins when PEOPLE lose CONFIDENCE in the government and they spend the currency as fast as they can or outright refuse to accept it. I have explained that the Japanese Emperor used a different approach. He DEVALUED all outstanding money to 10% of his new coinage. That led to the collapse in CONFIDENCE to the point that the people never trusted the government and as a result, the Japanese lost the ability to produce money for 600 years.

The definition of what creates inflation is entirely wrong. Even Gresham’s Law needs to be placed in context. Gresham worked in the foreign exchange markets in Amsterdam. Henry VIII debased the English coinage. But coinage traded on foreign exchange markets according to its metal content. The inflation Gresham referred to was experienced in the foreign exchange markets so what he truly observed was the decline in the British coinage value on international markets. Don’t forget, this predates the central Bank of England which was established in 1694.

The entire observation of inflation began with Gresham. However, it was extended by David Hume (1711-1776) who made observations BEFORE paper money began. This observation is not respected even today. David Hume showed why net exporting in exchange for gold currency, which then increased the domestic money supply and was hoarded by Britain, could not actually enhance wealth. Hume’s argument was essentially the monetarist quantity theory of money which would influence others over time. Prices in a country would change directly with changes in the money supply. Hume explained that as net exports increased and more gold flowed into a country to pay for them, the prices of goods in that country would rise with the economic boom. The USA saw this through the course of World War I and World War II ending up with 76% of the world’s official gold reserves. Consequently, an increased flow of gold into England would not necessarily increase England’s wealth substantially was Hume’s argument because the increase in domestic prices due to the gold inflow would discourage exports and encourage imports. Hence, this trend then counter-reacts with trade and automatically this will start limiting the amount by which exports would exceed imports. The more money that flowed into a country, like the USA, the higher the prices and this would then reduce exports. Adam Smith’s attack on mercantilism and argument for free trade, strangely ignored Hume’s argument. Hume’s view of capital flows can be verified throughout history and is really the underlying foundation of the balance-of-payments issues that Trump fails to understand. Hume also advanced the idea of “creeping inflation” that takes placed with a gradual increase in the money supply that would lead to economic growth. This is largely correct, but money supply growth must also keep place with population growth or you will produce deflation – more people and less money to go around.

With the introduction of paper money during the mid to late 18th century, the relationship between the over-supply of banknotes and a resulting depreciation in their value was noted by earlier classical economists such as David Ricardo (1772-1823). However, the issue of paper money during the American Colonial period must also take into consideration two factors: (1) England starved America and extracted money assuming they were using Spanish coinage, and (2) the American Revolution which was funded by creating paper money. There was again a lack of CONFIDENCE to the extent that when the American Revolution ended, the Constitution prohibited States from issuing money again and federally no paper money was issued again until the American Civil War in 1861.

Therefore, most HYPERINFLATION periods are associated with war like the American and French experiences. However, in Lydia, the very first government to issue coins, we see the debasement unfold as a direct result of war. Therefore, there is no evidence of hyperinflation unfolding absent a collapse in the CONFIDENCE of the people in that government.

In the case of Venezuela, obviously there has been a collapse in CONFIDENCE. The same was true in Zimbabwe after it seized all the property of white farmers. Foreign investors refused to ever participate again.

The German HYPERINFLATION came with the Communist Revolution in 1918. That sent capital into hiding and fled overseas, primarily to the United States