Inflation its real cause
"An increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices: it may be caused by an increase in the volume of paper money issued or of gold mined, or a relative increase in expenditures as when the supply of goods fails to meet the demand.”
Inflation as defined by Webster's New Universal Unabridged Dictionary 1983
Global food prices have shot up and have had derogatory impacts on economies world over. So widespread has been the impact that even the developed countries are caught in the tide of inflation. In USA the prices of fuel for domestic transport has inflated at the rate of 11%, college education at the rate of 7%, health insurance at rate of 10.1%, heating oil at the rate of 14%. The overall price rise USA is at a 23year high of 6.1%! Inflation in India has also seen major surge, with the rate breaching the 12% barrier this month. The direct impact of this has been alarming as increase in price of essential commodities leads to a increase in the number people below the poverty line, which means more people are not even able earn enough to get a square meal a day. Economists say that inflation in the current scenario is one of the biggest threats to the world. Inflation is generally caused either by increase in amount of currency in circulation or by fall in the supply of goods much below the demand.
In history most of the inflations have been caused by increase in the amount of currency circulation. After the Second World War the German government devalued its currency Marc considerably due to which there was widespread inflation. Devaluation lead to major upheaval in German economy. 1 dollar was equal to about 4.2 marcs but after devaluation a dollar became equivalent to 162 marcs! At one point the situation became so catastrophic that to mail one post card in Gernany one had shell out upto a million marcs! Government started printing currency notes valued at a million marc each! Thus the purchasing power of any currency is under direct government control and it can always reduce it by pumping in more currency notes into the market thro’ its reserve bank. In general there are many restrictions on this direct devaluation exercise as the guidelines of the constitution only permit the Government to print currencies equivalent to assets of the reserve bank. Originally total currency notes printed and released into the open market by the government was always against the value of gold reserves but this was later modified. The modern world economies have become more complex with the advent of promissory notes, government bonds, and many more economic instruments and social security based funds floated by the government. Many policies of government can indirectly push the inflation button. Government itself is one big debtor as it has many internal and external debts committed to thro various schemes of social welfare and infrastructure developmental schemes. For example the American government needs 58trillion dollars as on today to pay its current liabilities whereas, Indian government’s current liability internal is 23,93,546.53 crores of rupees and external debt is 76,715.69 crores of rupees! These huge liabilities can only be cleared by putting pressure on other sources of funds for the government, which in turn have an impact on the values of our currency of a state.
Apart from government policies hoarding by middle men and other capitalistic forces are among other major causes for inflation. When there is a demand for commodity, traders hoard the commodity with out releasing the same for open trade. This leads to major multiplication of deficit in the demand supply chain and thus pushing up the price. In general prices of goods skyrocket because of a combination of– please all government economic policies, or flooding of bad money due to excess release of notes into system and hoarding by the traders. The root cause of these malpractices and no proper vision is greed. Greed on the part of people at the helm of the government to remain in power at any cost and greed on the part of capitalists to make money at any cost. Thus problem of inflation can only be solved if the traders and politicians are trained to control their greed.
Greed –of course is the root cause of inflation- but a more direct cause is the flaw in the current system of valuation of currency. In the current system value of the currency is under the control of too many factors and when there is collapse of the system or when the government itself is in huge debt it is value is subject to alarming shifts. In such cases the currency looses its value and it is no more valuable than a piece of paper. This has happened during the 1980’s in the South American countries which had hyper inflation rates(rates above 50%) and post world war Germany.
As Srila Prabhupada says:
….So therefore gold standard is accepted everywhere. There is a standard price of gold, so when I pay you money, it must be, carry the value in gold…Then there is no inflation. The people want to be cheated, and people cheat. That's all.
(Srila Prabhupada morning walk converstions in Våndävana, March 12, 1974)
The most time and tested system of transaction was a gold standard based currency system. The government should look to implement this gold standardized system as the for currency transactions. This will bring in forced control and prevent hoarding. The whole system of valuing the transactions will be based on an item which has an intrinsic value. Gold which itself has an intrinsic value as a commodity will stabilize the system and prevent the currency from getting devalued in extremes.
The current economists and should do a lot of soul searching and then they will be able to appreciate the efficacy of the gold standard based system.
A prominent American economist and critic Edward G Griffin states:
“… The major cause of inflation is the original devalued money that American government flooded into the system… Our policy makers should shift to hundred percent gold standardized system…”
When will our economists and policy makers take this sound piece of advice? Hope we will live to see that day!
Hare Krishna!
