Summary Page Profit & Debt There Is A Better Way About Monetary Reform Take Action Article Index Feedback Page Links Page Monetary Reform Cinema
Placeholder Picture Placeholder Picture Placeholder Picture
Placeholder Picture

If you take a close look at inflation you will see that all price increases only end up in one of two places, either wages or profits. All price increases in intermediate costs like raw materials, components & supplies, fuel & energy, buildings & equipment, interest, rent, etc. are simply cost transfers from one business to another. If, however, you follow the money back to the business that actually initiated the price increase (ignoring the ones that merely responded to a transferred cost increase), you will find that either internal wages & salaries went up or operating margins & profits increased. There are simply no other possibilities (ignoring taxes).

For example, if a business raises its prices because the price of fuel goes up, trace back the reason for the price 

Horror of Inflation

increase in fuel. If it is because exploration or refinery costs went up, keep tracing the cost backwards. If it is because market trading prices went up, bingo!, you've located the true original cause... an increase in profits. Once you can pinpoint whose pocket the additional money went into, you've found the true source of the whole chain of price increases.

It is curious then that the Bank of Canada and the financial press have put such a great effort into vilifying inflation. Inflation is often portrayed as a menace, a monster, a robber in the night that steals away the purchasing power of our money. The Bank of Canada now treats inflation as if it were public enemy number one. Controlling it is more important than our unemployment crisis or the crippling effect that high interest rates have on our economy.

Actually, inflation is a natural, healthy and essential part of a truly free and open market. Like a grease, inflation lubricates the friction between the interests of capital and the demands of labour. In a free market, both capital and labour continually strive for a bigger share of the proceeds from production. If labour wins a wage increase, management tries to raise prices in order to maintain or improve their previous level of profitability. If prices rise, labour attempts to negotiate a wage increase in order to maintain or improve their previous purchasing power. Neither side ever wins absolutely and the contest is never over.

The freedom to struggle, however, is essential if the market is to remain free and open. A market is really only free and open if there is an equal opportunity for all parties to negotiate for a bigger piece of the economic pie. As long as the market remains free and open, neither side can get too far ahead of the other before the other side begins to catch up. Inflation, or rising prices, is the natural consequence of each small victory for either side. In an open market, employed consumers from either side of production (ie. both capital and labour) rarely suffer much or for long from inflation, at least in terms of current earnings or purchasing power, so long as their right to negotiate for a “fairer-share” of the economic pie is not obstructed.

Inflation could be a problem for people who are trying to store the purchasing power of their previous earnings in their savings. Having no way other than interest to negotiate an increase in their savings, over time part of their purchasing power could be lost to rising prices if interest rates should fall below the rate of inflation. This rarely occurs, however, as interest rates are normally maintained well above the current inflation rate. Inflation is really only a problem for people on fixed incomes, or for people whose incomes can't keep up with prices because they have no power to negotiate a raise.

The most likely reason behind the campaign to exaggerate the public’s fear of inflation is so that it can be used to justify restricting the rights of workers to organize, negotiate or strike for a bigger slice of the economic pie. In other words, it could be an attempt to dismantle the free and open market by turning the public against the grease which is needed to operate it. It is curious that those who demonize inflation never suggest that profits might need to be constrained in order to moderate price increases. Another reason could be that the fear of inflation allows the Bank of Canada and the financial community to rationalize and profit from the excessively high interest rates which they claim are necessary in order to battle the beast. The fact that the high cost of money is often one of the main causes of inflation doesn't seem to bother them in the least.

If the Bank of Canada was truly concerned about the devastating effects of inflation it could suggest to the government that all wages, salaries and prices across the land be divided by a common factor on a predetermined date. In an instant, all of the effects of inflation would disappear and judging by the newly reduced prices, it would seem as if society had simply gone back in time.

For example, if the common factor chosen was ten, and the day before the predetermined date you earned $50,000 a year, an average house cost $250,000 and a medium-priced car cost $20,000, then on the day after the change you would earn just $5,000 a year, but houses would cost only $25,000 and cars only $2,000. It sounds like the sixties to me!

It would be interesting to compare the differences between the relative purchasing power of workers and management immediately after the reduction with the relative purchasing power that actually existed in the sixties. It is extremely unlikely that you would find that workers now had a bigger slice of the production pie than they did fifty years ago.

The tremendous growth of speculative financial capital "investments" has made it much more difficult to classify which of the two pockets price increases actually end up in. Are capital gains from stock sales and futures contracts wages or profits? Professional traders earning a commission might argue that their compensation is merely a salary. But ask a minimum wage worker if an income of a few million dollars or more is a wage or a profit and you might get a different answer.

The bottom line is this. If inflation is caused by free and open bargaining between management and labour over how to split the rewards of productive work fairly, then it is a necessary part of a democratic economy. If, however, inflation is caused by limiting the bargaining rights of productive workers and the extortion of wealth using usury and speculation by a class of financial predators who are totally unproductive themselves, then inflation is a destructive, unnecessary force that eventually transforms democracy into a financial dictatorship.