Power of Story: Increase in All Prices

In order for a country to experience a functional economy, it must produce goods and services. Through that production income is created to meet the needs of the people of those countries. In the 150 countries I have traveled I have had the opportunity to observe various economies in action and have watched the choices made by the leaders of those countries. In many cases I have also had the opportunity to later observe the consequences those choices set into motion.

The leaders of those sovereign countries may begin to desire goods, services, military weapons, conveniences, comforts, or inordinate political clout for themselves. Their gross national efforts, however, may not have produced wealth enough for the legitimate purchase of those items. An overwhelming temptation then comes for those leaders to start tinkering with the economy.

One irresistible temptation comes when the leaders discover that they can purchase the right to govern the people by promising and periodically delivering goods and services to the constituents. In nearly every African country where I have had business dealings the leader, in an effort to gain the opportunity to govern the people, promises to deliver free electrical service to the urban and rural areas of the country as well as free medical health care to the constituents. Of course, he has absolutely no way to fulfill those promises until he gets into power and is in control of the economy.

The methods of tinkering with sovereign economies throughout history have been varied and extremely creative. The early kings always saw to it that they possessed the exclusive right to mint coins or print currency. In that position they had access to all the gold and silver coins that circulated through the kingdom’s treasury. The king’s men simply took the coins and artfully filed or clipped off a portion of the precious metal. That was called coin clipping. Sometimes the coins were put into moistened leather bags where they were shaken and beaten until small pieces of the coins would come off and cling to the inside of the bag. That was called coin sweating.

At other times holes would be drilled through the coins in order to retrieve amounts of precious metal. Upon occasion, the sovereigns would make a sandwich by using cheaper metal only clad with gold or silver but still call the coin by the same name. Obviously, that would devalue the coin. The king would then take the clippings he had gleaned and mint new coins. Since he was the first to use the altered coins, he would pass them off at full value. Suddenly there would be more coins and fewer goods in the kingdom.

The merchants were helpless to do anything about the coin tricks but they still had an alternative. Since there was, let’s say, twenty percent less gold in the clipped coin, they were forced to simply compensate by raising their prices by twenty percent to offset the difference. A sustained increase in the general level of all prices was experienced, i.e., inflation.

What the king had cleverly done was to impose a twenty percent tax increase on the people without having to go out and collect it. Now he had funds to go purchase his wants. Of course, it didn’t take long for the king to realize that he now had a new problem. The people began using the debased coins to pay their regular taxes. He felt cheated since he was not collecting as much gold now as he used to. But, no problem, like a dog chasing after his own tail, he would simply repeat the whole operation.

The old economist Adam Smith said that the kings who did this:

           . . . were enabled, in appearance, to pay their debts and fulfill their engagements with a smaller quantity of silver than would otherwise have been requisite. It was indeed in appearance only; for their creditors were really defraudedof part of what was due to them. All other debtors in the state were allowed the same privilege, and might pay with the same nominal sum of the new and debased coin whatever they had borrowed in the old. Such operations have always proved favorable to the debtor, and ruinous to the creditor, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.

A confiscation or straight tax by the king would not have been nearly as harmful as inflation. A tax would have only affected the relationship between the king and those taxed. But the tragedy of inflation is that it affects and disrupts the relationship ofeveryone in the country. People who have saved money as a store of value no longer have what they though they possessed. Creditors who loaned money with an anticipated return are repaid with less value, and insurance values are wiped out.

An increase in the supply of money relative to the supply of goods is the cause of inflation. Without the possibility of the sovereign government being able to alter the supply of money in the system, there would be no sustained inflation.

Next Week: Tents and Tiger Teeth

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics)