Feature Article: Inflation is a form of theft

Stopping price inflation by halting the inflation of the rand would give pensioners, savers and low income people a break. It would halt the perpetual price increases that make their lives miserable. The action of curbing this form of theft is entirely in the hands of the SA Reserve Bank and government.

Actual inflation is not the unending price increases to which we all have had to become reluctantly accustomed; it is the debasement of the currency brought about by the issue of too much of it. All currencies now consist of pieces of paper with coloured printing on them; the issuing of excessive quantities is merely a question of keeping the printing presses running.

Limitations on the quantities of money printed or minted is entirely in the hands of whoever issues the instructions to the technical staff that produce and distribute it. Because paper money is no longer backed by gold there is no limitation on its issue, such as the quantity of gold stored in a vault.

In ancient times, debasement of money could be discovered by weighing the coins or melting them down to determine their silver or gold content. The citizens of Rome, for instance, knew very well that on the instruction of their more untrustworthy Emperors the mint was adding an increasing percentage of base metals to the silver in the denarius. Between about 180AD and 280AD, the silver content of the denarius decreased from around 80% to about 5%.

Traders measured the quality of their goods against silver so they quite naturally adjusted the prices of their goods according to the silver content of the coins, which infuriated the Emperors. They expected the traders to blindly accept the coins as if the silver content had remained unchanged. Emperor Diocletian instituted price controls with severe penalties, including death, in an attempt to prevent traders from increasing their prices to compensate for the debasement. The traders responded by disappearing, along with their goods, into the hinterland, causing shortages of much-needed products. Nicolas Madura, the President of Venezuela, is currently conducting a similar futile and harmful exercise. Then, as now, attempts by government to fix prices at low levels cause shortages.

Debasement of coinage was easily detected in the old days, especially when the debasement was a crude clipping of the edges of the coins. Modern coins are mere tokens minted from base metals and often cost more to produce than the value they represent. Debasement of paper money is another matter entirely because it is invisible.

Pricing goods and services is a discovery process and depends on the relative value that consumers place on them. If we did not have the problem of steadily debased currencies forcing prices to continually move upwards, they would actually remain relatively stable. Price increases and decreases would reflect shortages and surpluses of goods and services, not a change in the purchasing power of the currency.

Currency inflation interferes with myriad economic calculations that occur daily in the market place and considerably reduces economic efficiency. Price increases under such circumstance do not necessarily reflect a shortage of supply but probably result from a reduction in the purchasing power of money after an untoward increase in its quantity. Exchange rates of currencies are similarly affected and, over time, reflect the different rates of debasement. As in the adjustment of prices for goods and services the process of adjustment of currency values is not instant. The first receivers of newly created paper money enjoy an advantage of being able to buy at prices not yet affected by the latest currency inflation.

South Africans suffer severely from the continual debasement of the rand. Savings have been eroded, economic calculation disrupted, and South Africans have become poorer than they otherwise would have been. Particularly cruel, is the surreptitious theft of pensioner savings.

When the rand was introduced on 14 February 1961, R2 equalled £1 and R0.714 equalled US$1. Today, we exchange about R16.50 for £1 and R10.30 for US$1. This means that since 1961, the rand has lost 93% and 87.9% respectively of its purchasing power by comparison with the dollar and pound.

On 29 November 2001, Reserve Bank Governor, Tito Mboweni, pointed out that prices in SA were approximately 70 times higher than in 1921 while, over the same period, prices in the United States had only increased tenfold.

In January 1966, the US monetary base was $60.5bn. The figures for January by decade thereafter were: 1970 $76.4bn, 1980 $156.2bn, 1990 $292.1bn, 2000 605.1bn, 2010 $1,994.9bn and then for October 2013 $3,628.1bn. The monetary base multiplied 59.97 times in 47.75 years. The purchasing power of the dollar has declined from $1 in 1913 (when the Federal Reserve was established) to $0.042 in 1913 dollars today.

In January 1966, the SA monetary base was R512 million. The figures for January by decade thereafter were: 1970 R753 million, 1980 R2.1bn, 1990 R10.9bn, 2000 R25.0bn, and 2010 R123.4bn and for September 2013 R176.4bn. The monetary base multiplied 344.5 times in 47.66 years. This means that SA has debased the rand more rapidly than the US has debased the dollar, which helps to explain the severe decline in the exchange value of the rand against the dollar over the period.

The increase in SA’s monetary base since January 2010 at R53.033bn (less than 4 years) is almost the same as the total monetary base in July 2003, which was R53.072bn, a mere 10 years ago. Notes and coins in circulation at 31 January 2010, amounted to R72.547bn and in September 2013, R105.604bn, an increase of a massive R33.06bn (45.6%). By any standards the base money supply has been increased excessively and cannot do otherwise than cause price inflation. As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon”.

Many economists tend to warn against deflation but one of the best decades in US economic history was marked by deflation. During the period 1879 - 1889, the first years after the return by the US to the gold standard following the Civil War, there was a remarkable phenomenon. Prices declined by 4.2% and wages rose by 23% over the decade. In the absence of inflation, savings and capital formation rose, productivity increased and the economy flourished. If instead of inflation, SA enjoyed a period of deflation with prices steadily decreasing and wages steadily rising, standards of living would definitely improve.    

The SA Reserve Bank can stop general price increases (PPI and CPI) by ceasing the inflation of the rand. There will be some repercussions for businesses that thrive on currency inflation but they will benefit by sound money in the longer term. To deal with the effects of a stronger rand, government can abolish exchange controls and the legal tender laws. Firms will deal with currency issues directly by conducting business in the currencies used by their foreign customers.

With no currency inflation to perpetuate continual price increases, the poor will be able to cope easier; pensioners will again be able to live their lives according to a reliable means, and all other South Africans will be able plan much better for the future, and that includes government.

Source: This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.


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