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The Cure For Inflation

Inflation is everywhere, an increase in the supply of money and bank credit caused by the Central bank. Money is manufactured in a complex process, in which government securities are purchased by the Reserve Bank of India (RBI), which is accompanied by the creation of new and additional checking deposits for the treasury. When the quantity of money is increased in this manner, too much money starts chasing too few goods and the purchasing power of money decreases, which leads to a rise in prices. It should be kept in mind that the rise in prices is merely an effect of inflation and the real cause is that the money supply has been “blown-up”, or overextended.

Some economists were claiming that in India, inflation has occurred mostly after major droughts and hence, inflation is not always a monetary phenomenon? It is a known fact that prices have been rising continuously for the past several decades. Their arguments, if taken to its logical conclusion, would mean that there were droughts continuously and material civilisation is slowly disappearing, which obviously isn’t true. Whatever the popular perception is, the supply of goods and services have been increasing year after year and prices could rise only if there is an increase in demand, which exceeds the supply of goods. It is also illogical to attribute a general rise in price level to oil prices. If the price of oil rises, people would restrict their consumption of other items and the price of such items would fall.

Hence, it stands to reason that a general rise in prices wouldn’t occur if the oil prices rise. Inflation is purely a monetary phenomenon, no matter how hard the statistics try to evade that fact.Intellectuals and politicians would want the public to believe that inflation is an act of God, over which we humans have but no control. Inflation, however is a policy, and as any policy, it can be halted. Our government goes on with its inflationary policies because it wants to tax the public, but lacks the courage to resort to it in so explicit a manner. Inflation, is in fact a hidden tax everyone pays irrespective of their incomes. It is a tax, which hits the poor more than it hits the rich. The sections hit most by inflation are orphans, widows and the elderly who live on the buying power of life insurance policies, pensions and annuities. Inflation leads to a re-distribution of wealth from the poor to the state and its parasites.

If the gold standard and a free banking system were instituted, which means, if paper money were redeemable in gold specie, it would have put a rein on inflation? The governments all over the world have however, abolished the gold standard long ago to finance their policies of lavish spending and bribing the voters. The abolition of the gold standard led to the printing of currency recklessly, without any objective standards where the gold could have been the objective standard. There is a long running propaganda from the part of economists of the establishment to make people believe that the gold standard has collapsed, and what we need is efficient monetary management. In the words of John Maynard Keynes, gold is out-dated, old-fashioned, a barbarous relic, an ancient fetish. What people failed to realise was that all this was mere propaganda fed by court jesters in order to persuade people not to use gold in real life. Gold standard did not collapse. It was destroyed using brute force and coercion.

Monetary management is simply an euphemism for continuous currency debasement. There would be no such thing as monetary policy in a world of sound, honest money. Earlier, the Planning Commission deputy chairman Montek Singh Ahluwalia had said that there is no ’magic bullet’ to cure inflation. What he didn’t mention was that inflation was caused by the Central bank itself and that it could be cured to the extent it could be, through a free banking system and objective laws to make currency redeemable in specie.

Nothing can be more ridiculous than the notion that the Reserve Bank of India, the institution that has created inflation in the first place has taken upon itself the task of taming inflation. Once the inflation has started, government’s policy should be laissez faire. Some might find the idea disturbing that the government should do nothing to stop the inflation that it itself has started. Inflation once started, but, can’t be ’tamed’. It should be allowed to run its full course.

If one understands the real cause of inflation, the cure should be obvious. It is to halt the money printing press and institute the gold standard as soon as possible. The Reserve Bank of India should be abolished and a free banking system should be allowed to come into being. People often refer to Thomas Tooke’s dictum that “Free trade in banking is free trade in swindling.” Sadly, they are unable to see the apparent fact that a free banking system based on objective laws would put a halt to the inflation process. Prices would steadily fall, year after year, and boom-bust cycles would come to an end!

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