A Challenge to Banking
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SECTION ONE - Dishonest Money
Inflation Is Not New
A young lad was walking down the streets of Baltimore in 1937.
In his pocket he had 750 dollars in cash. He was on the way
to the Ford agents to buy himself a new car. As he walked
along the road, he passed a bank. In its window was a poster
which urged people to purchase U.S. Government Savings Bonds.
Then, remembering his grandfather's oft spoken advice to
"be prudent and save your money", he entered the
bank to make enquiries. He was told that his 750 dollars would
buy him a Savings Bond which would be worth 1,000 dollars
in ten years' time. He decided he didn't really need a car
at the moment and bought the bond instead.
Ten years later, already in possession of a good car, he
decided to renew the bond for a further ten years. Then, in
1957, in need of a new car, he cashed the bond. It produced
1,450 dollars, almost twice as much as he had invested. He
was pleased, and headed for the Ford showrooms. To his shock,
he discovered that his 1,450 dollars would only buy half a
I was told this story more than 30 years ago, while training
for the New York Stock Exchange. The lecturer was emphasising
the dangers of inflation. None of us in that lecture room
had had any real experience of the effects of inflation. Most
of us, however, could imagine the feelings of the shocked
man in the story. He had lost half a Ford, and had not had
use of that money for twenty years. He would have felt robbed.
Angry. And full of distrust. Who would he have blamed? Not
money: money was beyond suspicion. But he would have found
someone to blame for his loss.
Money which continually loses value is dishonest. It acts
as a thief. It steals from those who save, from those on fixed
income, and from those who enter long-term contracts. Our
present society is heavily dependent on money. We rely on
it as a medium of exchange: we price other commodities in
terms of it. We rely on it as a store of value: any surplus
money saved we expect to retain a constant value. We rely
on it as a unit of measurement of exchange value: to provide
a standard for interchange between commodities and goods and
services both domestically and internationally. Society needs
to trust money, or the whole basis of our present monetary
system collapses. To trust money we need an accurate, trustworthy
and constant unit of money. Yet in an era of inflation, money
is continuously losing value.
To understand how inflation causes chaos, let us look at
another system of measurement with which we are all familiar:
time. What would happen if the unit of measurement of time
continually diminished in size?
Suppose that the United Kingdom used Big Ben as the standard
for time. What would happen if Big Ben suddenly developed
a mechanical fault which reduces the size of each minute by
Following the development of this fault, two people, each
using their own, accurate, timepiece might make an arrangement
to meet for lunch at twelve noon in front of a specific restaurant
in three weeks time. Both might verify their timepieces against
Big Ben at some time during the ensuing three weeks. But they
are unlikely to do so at the same instant. Unless they did,
they would not meet. Their only other chance of meeting is
if neither of them verified his watch.
Even if both did, the chances are that the restaurateur would
have verified his watch at a different time, and the restaurant
might not be serving lunch. By Big Ben, it would be 8.40 p.m.
Our duo might manage dinner together, not lunch, and they
would have to fit into the next day all the things they had
intended to do after lunch.
Worse than that, each day would be getting shorter. More
and more "missed" accomplishments would need to
be fined into shorter and shorter days. The rate of change
of schedules and of reappraisal and rearrangement of priorities
would be continually accelerating. And each and every individual,
whether or not he used a faultless chronometer, would be "out
of sync" with Big Ben and with each other.
Imagine the chaos. At the restaurant, for instance, suppliers,
waiters, cooks and customers would each be guided by his own
watch, whose degree of synchronisation would depend on how
recently each had been verified against Big Ben. Cooks might
have prepared food when customers did not want it. Waiters
might not have arrived to serve it. Suppliers might arrive
when the restaurant was closed, or the staff far too busy
to receive their goods. Good luck and good fortune with respect
to the timing of the comparison against official, Big Ben,
time would be more important than good planning and efficient
arrangement of priorities.
Planning would become suspect. Change would be the order
of the day. The rate of change would accelerate. Survival
would depend upon one's ability to adapt to change. "If
only I had more time", would be the constant cry.
Yet man cannot create time. Time would have begun to steal
from man. Time would be dishonest. Man can, however, create
money. Money, like time, is one of the units of measurement
which we use to determine the priority for our individual
expenditure of energy. In this respect it is similar to time.
Where the size of a monetary unit continually diminishes,
similar effects will occur: money will steal from man.
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Measuring money's dishonesty
Can we measure money's dishonesty? We can measure purchasing
power in terms of other commodities. One choice against which
to measure is a loaf of bread. Bread is made precisely to
demand. Left on the shelf it goes stale and becomes unsellable.
Historically, the one pound loaf is the most common size.
Measuring other commodities against a one pound loaf of bread
can give us a measure of money's dishonesty.
Consider for example, the price of oil in the years leading
up to the major price increase in 1973. The price of oil had
already increased substantially. In 1956, after a prolonged
shut-down of its oil fields, Iran agreed with British Petroleum
a price of 512.5 pennies per barrel of oil. This would have
purchased 100.8 pounds of British bread in the same year.
By 1968, the price of oil had risen to 623.4 pennies per
barrel of oil: 59.6 pounds of bread. By October lst 1973,
immediately prior to the substantial increase, the price was
1315.9 pennies per barrel of oil - an enormous increase in
nominal units of money since 1956. But that amount would still
not buy the originally agreed 100.8 pounds of bread: it purchased
only 73.2 pounds.
Value per barrel of oil
||Pounds of Bread
In terms of bread, the Iranians had been losing out for over
16 years. They had, during the course of almost two decades,
lost over 25 per cent of their purchasing power. Yet, when
they tried to claw back some of that loss, they suffered all
the opprobrium associated with insisting upon massive increases
in the price of oil.
And there we face the essential conflict about which this
book is written. Money is a thief: it no longer has a constant
value. No one in his right mind trusts a thief. Yet we need
to trust money.
Repair Big Ben, and the chaos created by the continuing diminution
of the size of the unit of time evaporates. The standard unit
of time becomes a constant, and all actions can once again
be synchronised. If we wish to have honest money, then we
must identify and repair the fault in our monetary system
so that each unit of money can have a constant value.
Introducing why interest rates are the wrong tool
to fight inflation and why we need to take a critical
look at the basic mechanics of the monetary and banking
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