No term in the vocabulary of economics is more misunderstood than
“inflation.” The word means “rising prices,” but is used at
different times by different groups to describe totally different
The most predominant type of inflation is natural and occurs as raw
materials are used and must be replenished. . Another type of inflation is
expressed through constantly changing conditions of supply and demand,
including the fluctuating cost of labor. Yet another type results from the
predatory pricing practices of monopolies such as the worldwide oil cartel
that continually increases the barrel price of petroleum.
Of an entirely different order is the inflation induced by central
banks such as the U. S. Federal Reserve in creating financial spikes or by
the federal government in taking inflationary actions such as annually
compounded increases in government employee salaries to reduce the real
cost of servicing its debt.
In any case, inflation is a fact of life that is almost impossible to
control, let alone understand in all its complexities and details. This
article focuses on inflation as it is treated by the
monetary system and in some cases similar Western countries.
You may be asking yourself at this point, “What does this have to do
with credit”? It has everything to do not only with credit but also, and
most importantly, collections. Because it has to do with money and the
ability to earn, spend and collect it. It is the reason why are customers
have difficulty paying for our goods and services; why our salaries do not
keep up with everyday costs; why our fiends, neighbors and spouses are
unemployed; and a factor in the over 15,000 business bankruptcy filings in
So let’s talk about money. Money is obviously an indispensable
component of our economic system. If it is properly constituted and
managed, it has the ability not only to obtain goods and services produced
and traded within the system, but also to encourage and create new types
and quantities of production. The presence or absence of sufficient
quantities of money, how it is created and introduced into circulation,
how its value is established and maintained, and how it is used or not
used to further the ideals of society are critical issues that are once
again creeping into our current political debates, not only in the U.S.
but also in the free and not so free world.
Unfortunately, these monetary issues only come to the surface within
the American political system during election years, thereby failing in
some of its most fundamental responsibilities. These issues are not
debated because people make the mistake of believing that money is, or
should be, a thing of value in-and-of itself, or that this value is
created by “market forces,” so is somehow a “given.” Many also
believe that monetary policy is a technical subject understandable only to
experts, and should be immune from political oversight.
But history shows that money serves its socially-beneficial purposes
only when it is regarded as an economic medium-of-exchange and when it is
regulated by a government which can responsibly direct its benefits to the
common welfare of all citizens. Such is not the case with the
and other Western nations today.
The drafters of the U.S. Constitution held a progressive view of money
by the fact that they gave Congress the power “To coin Money, regulate
the Value thereof, and of foreign Coin, and fix the Standard of Weights
and Measures.” During the nineteenth century, the Supreme Court
confirmed, in cases involving the “Greenbacks”, that this authority
includes the issuance of paper money.
Through much of
history, the monetary power has been implemented through a variety of
methods, though since the creation of the privately-owned Federal Reserve
System in 1913, it has been exercised primarily by the private banking
system which lends credit into circulation and charges interest for its
use. Today it is the political power of the banks and financiers that
prevents monetary matters from being examined and debated the way they
should be. Banking under a privately-owned central bank is not contained
in the Constitution. It is an extralegal construction resulting from
abdication by the United States Congress of its own lawful prerogatives.
The way money is viewed in the eyes of the banking system is to confuse
it with “wealth.” “Wealth” to them means cash or bank deposits.
“Wealth” is regarded as belonging to private individuals, not the
government. Granted, the government has the power to commandeer private
wealth through taxation, or borrow it through the sale of bonds and other
securities. Also, the government holds the title to certain assets,
including land, buildings, equipment, etc.
But the government should not originate wealth. Therefore, money,
viewed primitively as a commodity with intrinsic value, not as an
instrument of exchange created by law, cannot be created or originated by
the government. This is the presumption on which today’s bank-oriented
monetary system is based, and is why it is so inadequate to meet the needs
of its citizens.
We tend to forget the fact that at critical periods of our history,
such as during colonial times, the Revolutionary War, and during and after
the Civil War with the issuance of the “Greenbacks”, the government
did in fact directly issue its own money without resort either to debt
instruments marketed to banks and/or the public or to collection of taxes
as backing for the currency. That is to say, the government exercised the
power at these times to utilize its sovereign prerogative to create
“wealth” on behalf of the public from which it received its authority.
It then used this “wealth” to meet legitimate public objectives, such
as to wage the war that won
independence or the war that preserved the
. The fact that this wealth was “real” was reflected in the ability of
the government to receive such monetary tokens as payment-in-full of
Also, the government circulated wealth in the form of metallic coinage,
gold & silver, though its monetary value has been virtually eliminated
by inflation of the Federal Reserve Notes that, since their introduction,
have destroyed ninety-five percent of the value of the dollar. Money is
then a mere token used to facilitate exchange within this complex of
Unfortunately, the present course of affairs as defined by the current
Federal Reserve System which oversees our monetary system falls short of
these rightful uses of money. With the participation of the financial
industry, the Federal Reserve mainly assures as its first priority that
the wealth held by the banks will never be relinquished by them and, if
possible, will never be diminished.
Rather this wealth will perpetually increase through the interest
charged for its use. Of course money borrowed from the banks may be used
by debtors to create new assets or may simply be spent on consumer goods.
Thus the banks have become the primary focus of power within our
nation. This is implied whenever the word “stability” is used with
reference to the financial system. Businesses, households, and individuals
may be subjected to the “creative destruction” of market forces, but
not the banks. Also, given compound interest, a monetary system based on
lending must result in the migration of all a nation’s wealth into the
hands of the lenders within a few generations. This is what is happening
The current crisis dates back to 1979 when the Federal Reserve
initiated a severe recession in order to fight the inflation which had
built up in the aftermath of the Vietnam War and by the 1971 removal of
the gold standard for international currency transactions. The situation
was similar to what happened prior to the Great Depression, starting well
before the 1929 stock market crash.
Since the recession of 1979-83, the concentration of wealth in the
hands of the nation’s upper income groups, i.e., those with money to
lend or invest, has been increasing, all the way through the economic
resurgence of the mid- to late-1990s and up to today. Claims during this
period by the Federal Reserve that inflation has been brought under
control are called into question by everyday experience, during which
individuals and families have seen large increases in prices for such
necessities as housing, utilities, fuel, health care, education,
In fact, an examination of the Consumer Price Index (CPI) published by
the Bureau of Labor Statistics indicates a record of relentless and
unabated price inflation since 1965. The rate of increase slowed somewhat
during 1979-81, when the Fed-induced recession began, but it resumed its
climb and has continued upwards ever since then. In fact, prices have been
virtually out-of-control for the last thirty-eight years despite official
disclaimers to the contrary. For this the Federal Reserve has offered no
explanation, has no answers, and in our view, has never had a plan to
implement its function.
As stated in its own 1994 publication, “The Federal Reserve System:
Purpose and Functions,” the first duty of the Fed is “conducting the
nation’s monetary policy by influencing the money and credit conditions
in the economy in pursuit of full employment and stable prices.”
Since the Fed came into existence, neither of these two objectives has
ever been achieved. Can it be that given the way our monetary system under
the Fed is constituted, the two goals of full employment and stable prices
are contradictory? Some have even ventured that the chief method the
Federal Reserve uses to reach for price stability has been to create, or
at least tolerate, unemployment. In fact the Fed in its actual operations,
at least since 1979, has treated full employment and price stability as
being mutually exclusive. Otherwise it would not have created a major
recession at that time, where unemployment increased by sixty-five percent
and many businesses and even some major industries were decimated or
The Fed exercises its powers by expanding and contracting the currency
through the three tools of buying and selling U.S. Treasury securities
through open market operations, operating the discount window at the
Federal Reserve Bank of
, and establishing reserve requirements for financial institutions which
are engaged in fractional reserve lending.
The ability of the Fed to control the amount of money in circulation
and to influence economic outcomes is limited. Returning to 1979 when the
Fed sought to squeeze out the inflation from the economy that had built up
during the years following the Vietnam War—partly through the money
policies of Arthur Burns, Chairman of the Fed under President Nixon—it
did so by raising the federal funds rate for borrowing by member banks.
Under Chairman Paul Volcker, who was appointed in 1976 by President Jimmy
Carter, interest rates soared at times to above twenty percent over the
next several years, rates unprecedented in the nation’s history.
These actions had only a slight impact on reducing inflation, but at a
terrible cost to the American economy and to American workers, farmers,
and small businesspeople. Also devastated were the poorer areas of
’s cities that had been steadily climbing out of poverty. Examples were
the destruction wrought in places such as
, where huge sections turned into “ghost neighborhoods.”
Since that time, the
economy has not recovered. These were the actions that wrecked our
manufacturing industries and produced the so-called “service economy.”
The nation languished in this condition as sub-par economic conditions
lingered through the Reagan years and into the term of President George
H.W. Bush. Continuing poor economic conditions contributed to Bush’s
defeat by Bill Clinton in 1992, with relief coming later through the boom
of the mid- to late-1990s, during the so-called dot.com bubble.
At this time, huge amounts of investment capital, particularly from
foreign countries and businesses, went into building the technology firms
that were leading the microcomputer and internet revolutions. But with the
recession triggered by the crash of the stock market in 2000, this
presumed prosperity was exposed as an illusion. Today we find ourselves
again in a serious stage of economic stagnation, marked by rising
unemployment and massive increases in consumer, business, and government
debt. And inflation marches on.
Faced with such circumstances, the Federal Reserve does not seem to
know what to do. By its own admission, it lacks measures and targets by
which to regulate the currency.
While the Federal Reserve has a general sense that the money supply
must be kept sufficient to meet the needs of the economy, it finds it
difficult to compare the growth of the two or define how they relate to
each other. So rather than watching monetary targets, the Fed says it is
steering by what it calls an interest rate “smoothing” policy. It says
it chooses a currency level consistent with economic growth with the
intent of supplying enough money to fuel the economy. Thus the Fed claims
that it wants to get the price of money right for the economy at any given
time, though the target is elusive.
In other words, the Fed doesn’t know what it is doing. What it mainly
seems to do is to watch the same economic indicators everyone else does,
and if it thinks the economy is “overheating” it raises interest
rates. When liquidity contractions appear to be too destructive and the
screams from individuals and businesses get too loud, it will then lower
them. Unless of course foreign investors start screaming, when the Fed
will raise rates again or leave them steady.
After starting to raise interest rates around 1994 to slow down the
economy during the dot.com boom which had been engendered by a “strong
dollar” policy by the U.S. Treasury to attract foreign investment, the
Fed later began to lower them in an attempt to revive the economy when
recession began in 2001. But this never really produced any type of
In particular, housing mortgage rates were lowered to the lowest rates
in four decades, thereby increasing available cash to consumers through
refinancing of existing mortgages and through new home equity loans. These
actions maintained activity in an economy that now relies for
three-quarters of the value of its transactions on consumer spending. Of
course such an economy is highly susceptible to variations in consumer
confidence, which was why, after the stock market plunge following the
terrorist attacks of September 11, 2001, President George W. Bush told the
public to go shopping.
As the deflating housing bubble has made clear, even this rare bright
spot in the declining
economy scarcely improved the employment picture except through low-paying
service jobs. Meanwhile, the ability of consumers to support the economy
has been weakened by the further decline of manufacturing due to NAFTA,
free trade policies, and the globalization of industry. The strong dollar
of the 1990s led to massive increases in the trade deficit and even more
reliance on foreign purchase in the
bond, stock, and Treasury markets. Now with the value of the dollar
falling, purchase by foreigners of securities is also slipping.
Ant the Congress is not taking any action to challenge the
interpretation of the proper goals of monetary policy. Indeed, Congress
seems totally passive in the face of the Fed’s own confusion.
In actuality, money is, or should be, also as stated at the outset, an
instrument created by law to act as a medium of exchange in facilitating
the legitimate trading of goods and services within the economy. The
Federal Reserve and the financiers do not view money this way. The term of
art for a commodity definition of money is “store of value.” It
implies that money is essentially the same whether it is being used or
not. But this can never be.
It is the duty of those in charge of monetary and economic policies to
facilitate the development of society. But today, neither the Federal
Reserve, nor other authorities such as Congress, the Treasury Department,
or the Executive Office of the President are doing the job they should be
doing. Instead, they are operating the monetary system to the advantage
and benefit of private banks and the private financial markets.
We might look at the inflation issue from another angle, in that
economists have pointed out that periods of inflation seem to coincide
with those of war. If we look at the history of price inflation since
1915, we discover a pronounced increase in prices during the periods of
World War I and World War II.
But what about the continued growth of inflation since 1965? What is
unique about this period is that the
has been in a state of permanent war mobilization since the
conflict. We know that no culture in history which has had warfare as its
main preoccupation has long survived, unless and until it has seen the
error of its ways and changed, or unless it simply was destroyed.
never really recovered after the Peloponnesian Wars. The debt-riddled,
exhausted itself in a blaze of military conflict, then saw defeat and
went bankrupt in a single generation from 1914 to 1945. The
is teetering on the edge of a major financial collapse right now. In fact,
those with money are quietly trying to secure their wealth while the
unfortunate ones who are heavily mortgaged or locked into inflexible
retirement accounts may be left holding the bag.
During 2009 15,000 businesses filed petitions to liquidate or
reorganize. 207 of those were publicly traded companies with assets in
excess of $600 billion dollars. These bankruptcy filings have affected all
of us, directly and indirectly, and should never have occurred and would
not have if we had the representation of our elected leaders and the
diligence of the agencies they delegated their responsibilities to. We are
all in this together, we are all responsible for where we are today and
most importantly things will not get any better unless we take the
responsibility to make changes. Those include an understanding of why
customers are having difficulty with their finances and finding solutions
to work with them so that both their business and ours can continue during
these uncertain times. Its not the economy it’s the forces that have
created this economy and they have no solutions so it is up to us to find
the solutions that work for us.
I wish you well
The information provided above is for
educational purposes only and not provided as legal advice. Legal advice
should be obtained from a licensed attorney in good standing with the Bar
Association and preferably Board Certified in either Creditor Rights or