Why the Worldwide Inflation?

SINCE World War II, nearly every nation on earth has been plagued with rising prices, or with what is called inflation. What is unique now is that inflation is taking place all over the world at the same time. That has never happened before.

Also, inflation is picking up speed in country after country. Why this worldwide inflation? What hope is there that prices will stop rising, or even go down​—and stay down?

A Basic Reason

Inflation can come for several reasons. One is shortages of goods. In their eagerness to get the commodities that are in short supply, people will be more likely to pay the higher prices that merchants ask. And, throughout the world today, there are quite a few items, such as food, that are coming into short supply.

However, one of the most basic reasons for inflation is government spending of more money than they get in taxes and other income. It is of interest to probe into this basic reason, since it has long been the one most responsible for inflation in various nations. In this regard, World Book Encyclopedia states:

“Since the development of banking and paper money during the past 200 or 300 years, inflation has been caused chiefly by deficits in the budget of a national government. A deficit is created when a government pays out more money than it collects.”

When a deficit occurs, the government has to pay its bills somehow. The way they do this depends on the form of government. In many Western nations, one way is to borrow money from its own citizens by issuing bonds. But that usually does not cover the debt.

So what often happens is that governments borrow from their own Central, or National, banks. Where do these banks get the money? When authorized by the government, they issue credits or simply print more paper money. They “loan” this to the government at a certain rate of interest. Ultimately, the taxpayer will be expected to pay the loan and the interest charges by means of taxes.

Some governments do not even bother to go through central banks to make up deficits. They simply tell their printers to print more paper money. With this new money, they pay their bills.

But when governments pump more paper money into the economy without anything of real value to back it up, it means that more money chases the available products. That causes prices to rise. It is somewhat like a public auction: when more money is available to the people at the auction, they will bid the price of items higher.

Concerning inflation, the American Institute for Economic Research stated the following:

“For a quarter century the principal money-credit systems of the world have been inflating their respective purchasing media [paper money]. Leading the procession among the more industrially developed nations has been the United States.

“In fact, the United States not only has led the procession in its creation of excessive purchasing media for internal use but also has exported much inflationary purchasing media by means of grants, loans, and investments abroad to such an extent that dollars are widely held in huge amounts by foreigners, including central bankers, who have labored under the delusion that a piece of paper is as good as gold.”

Record of United States

Since the United States has been ‘leading the inflation procession,’ it is of interest to see what has happened to her spending habits.

In the last forty-three years the United States government’s domestic budget has had a deficit for thirty-six of those years! Yes, 84 percent of the time it spent more than it made.

As a result, the government’s debt reached over 427 billion dollars ($427,000,000,000) in fiscal 1972. That is the highest debt in history, and it is going up all the time. Nobody seriously expects it to be paid back. Why, just the interest payments alone on that debt come to more than twenty-three billion dollars each year now!

That kind of deficit spending over a long period of time had to have a bad result. It did​—constant inflation.

Why so Many Deficits?

As we have seen, deficits lead to inflation. And deficits come about when a government spends more than it makes. But why such constant spending by so many governments in our time?

One of the main reasons is WAR. Of all the items in the budgets of most governments, the largest is often military spending. In the United States, military spending costs about seventy-five to eighty billion dollars each year!

But war destroys; it does not build wealth. Even in peacetime, war equipment produces nothing of real value. Instead, it soon becomes obsolete and must be replaced, usually by even more expensive equipment. True, such spending does create jobs. But it also creates huge debts, so no real wealth has been contributed to the nation.

Instead, it is more like a blood-sucking parasite draining away strength that could be far better used for other purposes. For instance, think of the benefits that could result if the seventy-five to eighty billion dollars that the United States spends on its military were devoted to peaceful pursuits. The same could be said of the Soviet Union or any other country. It would create just as many jobs, but think of how many cities could be rebuilt, how many new homes constructed. Think of the improvement that could be made in health care, transportation, parks and recreation areas, in reducing poverty and pollution.

An Example

To understand better what war and huge military expenditures do to an economy, let us imagine two families living next door to each other. Each has a nice home and property, and just enough income to pay their bills.

Now assume that they begin to distrust each other, so that one family buys a gun for protection. The other does the same. This begins a cycle of buying bigger, more costly weapons. But since they cannot afford them, they begin borrowing money.

Finally, they actually “war” against each other, destroying each other’s property. Has that destruction improved their living standard? Hardly.

Then, after that “war,” they have to rebuild. But, still suspicious of each other, they keep up their purchases of ever more costly weapons. In order to do all that, and to live from day to day, they borrow more and more money, falling farther and farther behind in their debt repayments.

Now, then, has the standard of living of these families really improved? Not actually, for no real wealth has been added. In fact, their standard of living is affected adversely when they buy weapons and rebuild “war” damage, since they have to take money away from other purchases. Also, it may appear as though they are improving when they borrow heavily to buy all the things they want. But when the bill collectors eventually demand payment, their real condition will be exposed.

Same with Nations

On a much larger scale, this has happened to the nations of the world in our lifetime. They have bled themselves to support the god of war.

By their constant warfare, they have destroyed vast amounts of property and wealth. Additional vast amounts of wealth have been used to support ever more costly weapons and armies, even in peacetime.

In order to pay for all that, and to pay for other things that they want to do, most nations have spent more money than they made. Hence, inflation. As an observer wrote in the New York Times:

“The root causes of inflation, above all others, are big military spending and failure to pay for it with adequate tax revenues. . . .

“A substantial part of this vast treasure of dollars and supplies is lost to our domestic economy, thus stoking the fires of inflation while denying funds to meet critical human needs at home.”

In addition to governments spending more than they make, in recent times vast numbers of people have done the same. They have gone on a huge “binge” of borrowing money to get what they want. And certainly, for a while, such borrowing and spending will enable them to live better. But there is always a day of reckoning with the bill collector.

Also, this borrowing from lending institutions, such as banks, “creates” more paper money. Owing to the nature of banking, for every dollar in bank deposits, a bank can make loans of many times that amount. And since most money transactions are made in checks rather than in cash, huge amounts of paper money are in this way “created” in checking accounts.

However, all this excess spending adds a flood of paper money chasing the available goods. That, plus excess government spending, puts more fuel on the fires of inflation.

Just how far has this splurge of excess spending proceeded in the United States? The total government and private debt in the country is now over two trillion dollars ($2,000,000,000,000)! That is far more than the yearly income of the entire nation! And this debt is skyrocketing higher each year.

Spending Overseas

But there is more. Another factor makes the situation even more unstable​—overseas spending.

On the international scene the United States has consistently spent more money in other countries than it has made. As a result, it has piled up tens of billions of dollars in debts overseas.

Business Week described it in this way: “Too many dollars have been created, and there is a huge, undigested balance hanging over world markets.” Some estimates of this “undigested balance” range as high as 100 billion dollars.

Why has the United States piled up such vast debts overseas? The Economic Education Bulletin of May 1972 answers:

“First, for many years the U.S. government has disbursed [spent] abroad more U.S. currency and credits than It has received from abroad. Through its vast and overly generous foreign aid program and through large military expenditures in other countries, it has placed these claims against it in the hands of foreign governments, central banks, and individuals. . . .

“Second, the United States has indulged in marked and prolonged inflating . . . for more than three decades. This development . . . has resulted in such a marked increase in prices [for U.S. products] that many U.S. processors no longer could compete in world markets.”

Of course, there are times when such overseas spending comes nearly into balance with income. But the overall trend for the United States over the past few decades in its foreign spending has been similar to the trend within its borders. It has consistently spent more money than it has made.

As a result of all this domestic and foreign excess spending, huge debts have piled up, both within the country, and outside it. How are these debts to be paid? One hope was that someday the trend would reverse, that income would constantly become greater than spending. That would gradually reduce the debt. But this has not happened; in fact, the reverse has. Hence, just how were these debts to be paid off?

At one time the answer was​—GOLD.

Gold​—the Role It Has Played

For thousands of years, when people purchased goods they had to have something of equal value to pay for them. For much of that time they paid for goods by trading other goods.

Later, one commodity was found to be more valuable, more desired than the others​—gold. Gold had unique properties. It could be kept indefinitely without deteriorating. It could be made into beautiful jewelry, coins or other items.

Hence, gold eventually became the best “money,” always acceptable. When paper currency came into being, it was often backed by this real money​—gold. As long as the paper could be turned in for gold, people trusted the paper money.

The United States was at one time on the ‘gold standard.’ Its people could turn in their paper money any time and get gold. But since the paper money was much easier to do business with, people preferred to use that. They felt confident using it, since it was “as good as gold.”

Then the Great Depression began in 1929. The United States government started to build up huge deficits, spending more than it was making. So, in 1933, the government ruled that its citizens could no longer get gold for their paper currency. Also, all Americans were ordered to surrender gold coins and gold bullion (bars or ingots) in return for paper money. The government thus protected its gold stock from being wiped out by people who were afraid of their paper money and wanted gold.

Yet, the law did require the government to have one dollar in actual gold for every four dollars of paper currency it had in domestic circulation. This acted as a restraint, preventing the government from printing more paper currency than could be backed by 25 percent gold.

Last Restraint Removed

But in 1968 that, too, changed. The government passed a law getting rid of the 25-percent-gold requirement as a backing for its currency. One result of this was noted by the American Institute for Economic Research. It said:

“Removal of the gold reserve requirement for Federal Reserve notes early in 1968 removed the last vestige of restraint on further inflating and severed the remaining link between U.S. currency and gold.

“Since then the exchange value of the dollar has been controlled by the fiat [decrees] of U.S. money managers no longer subject to the discipline of gold.”

With this restraint gone, it was observed that the government “continued to succumb to the continual political pressure for more and more inflating.”

In addition, all the silver was taken out of coins. Hence, the entire money system in the United States was divorced from backing by anything of real value.

What all of this meant was that the government’s currency had to be accepted on trust. But the Economic Education Bulletin noted:

“The present money-credit system of the United States is founded on a broken promise.

“We refer to the promise once found on the Federal Reserve Notes that now have been withdrawn from circulation, the promise to ‘pay to the bearer on demand x dollars,’ a ‘dollar’ being defined by law as one thirty-fifth of an ounce of pure gold.

“A broken promise is not a suitable foundation for a durable money-credit system.”

Where the paper money had once pledged on its face that the United States “will pay to the bearer on demand” the dollar value in real money (gold or silver), now it says: “This note is legal tender for all debts, public and private.” The paper certificate that had for centuries only represented the real money (gold, or even silver) was now declared to be money. But which would people trust in a crisis​—a piece of paper, or gold?

Foreigners also Told “NO”

While Americans could no longer get gold for their dollars, foreigners could. Gold was still the required money for payment of debts between governments in their international dealings. That was the arrangement that the Western nations had agreed to long ago.

But with constant inflation in the United States, foreigners became more distrustful of their U.S. dollars. So, many began turning them in for gold. Steadily, gold drained out of the U.S. Treasury. Here is what happened (in billions of dollars, round numbers):

Year U.S. Gold Stock

1950 $22,820,000,000

1960 17,804,000,000

1970 11,072,000,000

By 1971 the gold situation had deteriorated badly. Foreigners then held over fifty-five billion paper dollars, but the United States held gold valued at only about ten billion dollars. And the foreign dollar holders were showing signs of panic, of making a “run” on the little gold left in the U.S. Treasury.

In August of 1971, the United States took drastic action. It closed the ‘gold window,’ suspending gold payments for its debts overseas. The promise it had made to redeem paper dollars for gold in overseas transactions was repudiated. Other nations were shocked.

What did it mean? Some observers pointed out that for all practical purposes it meant that the United States had declared bankruptcy in its international dealings. This is another reason why the world’s money markets have become more unstable in the last few years. It is also why the price of gold on the European “free” markets has jumped from $35 an ounce to over $100 an ounce at one time.

What Will Happen to Money?

Summarizing what has happened, the United States, the anchor of the Western world’s economy, has taken the following steps that many economists regard as a debasing of its currency. It has: (1) forbidden its citizens to turn in paper currency for gold (or silver); (2) forbidden its citizens even to own gold except in jewelry or rare coins; (3) removed any gold backing at all for its currency in domestic circulation; (4) refused to allow foreigners to turn in their dollars for gold; (5) spent more money than it made, accumulating huge debts and issuing more and more paper money to cover them.

True, living on borrowed money can stimulate an economy. If an individual earned $100 a week and then borrowed another $100 each week, year after year, of course he would live better​—for a while. So too with nations. Their constant spending in excess of income does temporarily stimulate an economy. But it leads to huge debts and rampant inflation,

Also, a nation is not much different from an individual where economic laws are concerned. You reap what you sow. Sooner or later there has to come a day of reckoning for reckless spending. An individual or a nation that keeps spending more than it makes will someday go bankrupt. There are no exceptions to that rule.

At the same time, it is not likely that gold, silver or any other precious metal could indefinitely be used to back paper currency. Populations grow, and so must currency in circulation. But gold that can be mined from the earth is limited. So there is this dilemma​—people lose confidence in paper money not backed by gold (or silver), but sooner or later these precious metals could not back all the currency that would come into existence anyhow. This dilemma shows the basic instability of money.

Where It Is Heading

In any event, with fewer and fewer restraining forces at work, many nations have built up huge debts. They have flooded their economies with paper currency to pay their bills. As some economists have pointed out, any private citizen that did such a thing would be accused of counterfeiting.

One source stated that money printed without any backing “is as counterfeit and valueless as if it were printed in a gangster’s basement, the difference being that [the authorities] have a license and the gangster doesn’t. Tragically, the result upon economy is exactly the same.”

Of this process, well-known economist Milton Friedman writes in Newsweek:

“Economists have known​—at least intermittently—​for over a century and a half two propositions: first, that by printing enough money you can produce any desired degree of [economic] activity; second, that the ultimate result is destruction of the currency.

“The American public has learned the first proposition. It once knew, but has now forgotten, the second. Only experience is likely to teach it again.”

This echoes the warning given years ago by the Alexander Hamilton Institute in its book Banking. It said:

“Some governments have issued paper money without promising or intending to redeem it in gold or anything else and have declared it to be legal tender in payment of all debts.

“Paper that is thus declared to be money by the mere order or fiat of the government, is called fiat money. . . .

“Every experiment with fiat money has resulted in disaster because no government that has tried it has been able to resist the temptation to issue an excessive supply, with the result that the money has depreciated until it finally became worthless.”

All the evidence from the field of economics, and politics, indicates that things are no different today. Many governments are issuing paper money without anything of real value to back it up. Since “every experiment with [this kind of] money has resulted in disaster,” there certainly is no valid reason to think that our time is likely to be an exception.

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One reason for inflation is that, when items are in short supply, people tend to pay the higher prices that are asked

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When the United States closed the gold window in 1971, it repudiated its promise to redeem dollars for gold in overseas transactions