The risk of inflation is one of the most common knee-jerk responses to the suggestion that government should take responsibility for issuing the nation’s money supply. In reality, the risks of inflation would actually be less under the reformed system than they are today.
The Logic of the Objection
The logic of this argument is that any government allowed to control the ‘printing press’ will simply print as much money as they need to meet their manifesto promises, in order to get re-elected. Economic theory states that creating too much money creates inflation. The critics wheel out the old cliches of Zimbabwe and the Weimar Republic as evidence of this problem.
But Creation of Money By Banks is Already Inflationary…
What the critics tend to ignore (or are ignorant of) is the following:
a) the total amount of money in the UK has already been growing by an average of 10% a year for the last 30 years!
b) this ‘new’ money is money that has been created by the banks, which is matched by the exact same amount of debt.
c) this 10% year-on-year growth in the money supply has led to a 6-fold increase in house prices, a 6-fold increase in national debt, and inflation that is far beyond the official figures published by the government.
In other words, yes – creating too much money is inflationary. Under the existing system, the risk of inflation is high, because money creation is only constrained by the amount that we need to borrow. Since borrowing simultaneously creates more money, it pushes up prices even further (think of the house price inflation of the last 10 years), which in turn increases our need to borrow. Consequently we have a vicious cycle which produces inflation.
(Note also that – as any normal person intuitively knows - the ‘official’ rate of inflation used by the government massively understates the real rise in the cost of living that ordinary people experience. The real rate of inflation is usually around 4-6 times the official rate of inflation.)
So it is apparent that we already have a problem of inflation, as a result of bank-created money. The reform actually reduces the risks of inflation, by preventing banks from creating money, and permitting the state to create a well-controlled amount of money each year.
Inflation Would Be Less Likely After the Reform
Inflation would be less likely after the reform for the following reasons:
- Private banks would no longer be able to create an essentially unlimited amount of money: in fact, private banks would be unable to influence the money supply at all.
- The decision to create money would be taken by an independent panel – not by elected politicians: Gordon Brown and Alistair Darling would have no say at all over the amount of money that could be created in any one month, so there is no risk of the ‘Zimbabwe’ effect.
- The increase in the money supply can be strictly controlled: under the reformed banking system, it is possible to know on any particular day how money is in existence (something that can only be estimated under the current system), and consequently it is possible to make precise changes in total supply of money. While money creation under the current system fluctuates wildly (from the heights of a lending-fueled boom to the trough of a credit crunch), money creation under the reformed system can be steady and controllable.
Further Safeguards
There are a range of further safeguards that can be put into place to make the risk of inflation considerably less than under the existing fractional-reserve banking system. If logic and common sense alone isn’t enough to calm people’s fears of inflation, the following article might help to explain why the risk of inflation are less under the new system:
http://www.bendyson.com/the-laymans-guide-to-the-reform-part-7/2009/09/
