5. The Contagion of Inflation

CHAPTER FIVE

THE CONTAGION OF INFLATION

Your silver has become dross, your wine mixed with water. (Isaiah 1:22)

In chapter 4, I focused on the actual process of debasing a precious metal currency.

Once the process of moral debasement begins to spread, it is very difficult to stop it. People must take a stand in principle against this spreading moral corruption. The more that people see that corruption seems profitable, at least in the short run, the more difficult it is to persuade people to change. The corruption is contagious, almost like a disease. But it isn’t a disease; it’s a moral condition.

It was not simply that Judah’s silver had become dross. Their wine had also become adulterated.

Consider the winemaker. He spent a lot of time growing, caring for, and harvesting his grapes. It took time for the fermentation process to produce wine. These retarding factors reduced the available quantity of wine. Thus, for people to buy it, they had to pay a higher price than they would have been forced by competition to pay if there had been abundant supplies of comparablequality wine.

By the way, we should not argue that the high cost of wine production is what produced the high prices. This has cause and effect backward. What we should recognize is that all those buyers competed against each other to buy the wine. Their willingness to pay for it is what lured producers to stop producing other products and start producing wine. Buyers determined the price of wine by competitive bidding; the producers didn’t force the buyers to buy it. In short, customers set prices, not producers. If producers set prices too high, many customers won’t buy; they will buy something else instead, and then the highprice producers have to lower prices or suffer losses.

It is obvious that if good wine were easy to produce in huge quantities, customers would not have to bid so much money to buy the wine. But it isn’t cheap to produce in large quantities, so they do have to pay high prices.

Now, let’s return to the problem that faced the prophet Isaiah: the moral corruption of the people. It was not just the silversmiths who were corrupt. It was the winemakers, too. It was everyone.

How did the winemaker practice his corruption? By a process almost identical to that of the silversmith: debasement. The silversmith had poured cheaper base metals into the molten silver, but called the product silver. This was precisely the process of the corrupt winemaker. He was pouring “debased wine” (water) into the pure wine, and calling it pure wine.

How could he make his profit? The same way the corrupt silversmith made his. He would displace pure wine when he poured in the water. This displaced wine could then be used to pour into other wineskins along with more water. Then he could take, say, 20 percent more wineskins full of “wine” to market and sell them. Presto: a 20 percent profit, at least initially.

He was trading on his own former reputation. Before, he had produced a high-quality product (just as the silversmith had formerly produced). People trusted his products because they trusted his morals. So, he could take advantage of this trust by pouring water in the wine. He was simply imitating the silversmith.

But moral corruption being what it is, it never stays in one place. It gets worse. So, more and more water would wind up in the wine, just as more and more dross would wind up in the silver. Pretty soon, everyone would begin to see that a particular silversmith’s silver was mostly dross, and a particular winemaker’s wine was mostly water. At that point, people would stop doing business with these corrupt people, or else start offering them fewer valuable goods and services in exchange.

Unless …

Unless the existing silversmiths were acting as a giant monopoly to debase the silver uniformly (a cartel). Unless the existing winemakers were doing the same thing. Unless they controlled the markets (with the cooperation of the rulers) to keep out competitors who were willing and able to offer customers high quality silver or wine.

With government controls against honest newcomers, it would have been possible for corrupt sellers to maintain their corrupt practices and not lose their markets to honest newcomers. But this would have required coercion against newcomers, either directly (privately hired thugs) or indirectly (thugs hired by the government).

This was the very essence of economic oppression in Biblical times. It still is. When corrupt producers capture the government in order to keep out honest producers, the losers are customers. They are the ones whose interests are hurt, not just the interests of honest producers who are kept out.

Widespread economic oppression always requires the consent of the governors. In God’s world, it also requires the consent of the governed. God brings oppressors against those who practice oppression privately and who want to practice it without threat of judgment by the civil government. God hears the cries of the afflicted, and brings judgment against the oppressors (Exodus 22:22–24).

The Bible says that specific corrupt practices are like yeast (what the Bible calls “leaven”): they corrupt the whole loaf. But, on the other hand, honest dealing is also like yeast; it, too, can spread to the whole loaf. What determines which yeast is more powerful in any particular society? The hearts of the people. They will choose which kind of yeast they prefer, corrupt or incorrupt. In Judah, they had chosen corrupt practices.

Gresham’s Law

Back in the late 1500s, an official in Queen Elizabeth’s court, Sir Thomas Gresham, made a famous observation. He said (approximately) that “bad money drives good money out of circulation.” In short, debased money drives honest money out of circulation.

But if God’s law really does rule the world, how can this be true? How is it that something bad (corrupt, phony, debased money) can drive good money (pure gold or silver) out of circulation? Is there something corrupt about market competition? Why should the bad product defeat the good product in a competitive free market?

Economists finally figured out the answer. Something was missing from Gresham’s analysis. The bad money drives out the good money only when the government says the two are equal in value, and enforces this decision with the threat of punishment.

If I have a silver coin that will buy a loaf of bread, and I also have a phony, silver-looking coin that has only half the silver, the latter coin should buy only half a loaf of bread. But what if the government says the two coins are of equal value? Which coin will I spend on the loaf of bread, the full silver coin or the phony? I will spend the phony coin and hoard the full silver one, or trade the full silver coin to someone who wants to give me (perhaps illegally) three-quarters of a loaf of bread for it. (The bread seller will keep an extra quarter loaf—or whatever—as his profit, to compensate him for trouble and risk.)

So Gresham’s law should read: “The coin that is artificially overvalued by the government will drive out of legal, visible circulation the coin which is artificially undervalued by the government.”

But this artificial price which is set by the government isn’t a free market price. It’s a form of coercion. It’s a lie which is enforced as if it were truth. It is another example of the government’s violation of God’s law concerning weights and measures.

The Spread of Corrupt Products

Let us consider a society in which the rulers have established a fixed price which equates honest money (full-weight of gold or silver) with dishonest money (partially gold or silver, or even zero-content of gold or silver). The government lies, and it enforces that lie on everyone.

We are rational people. We don’t want to spend a full silver coin on a product which says “for sale for one silver coin.” We would much rather spend the common coin which lies, which says “pure silver,” but which is in fact only half silver. We will hoard the full silver coin for a better deal at a later time.

What does the businessman do? He knows he will not be getting full silver coins into his till that day. He knows his customers will spend the half silver coins. Now what should he do:

1. Continue to sell his product for “one silver coin,” when he knows that he will receive only half-silver coins?

2. Double his price to two silver coins, in order to get the same amount of silver per item sold?

3. Debase his product with cheaper quality materials, but maintain the fiction that each unit is worth one silver coin—the real, old-fashioned, true silver coin?

Consider the consequences to him of each of the three possible decisions:

1. Same price, same product: he gets stuck with phony coins. He is selling his product at 50 percent of what it was worth before the phony coins started circulating.

2. Doubled price, same product: he risks losing sales. Maybe his competitors will take the third approach, and debase their products. His customers, not being experts at quality controls, may not recognize this. He loses business.

3. Same price, reduced quality: his customers are initially defrauded (until they figure out the new rules). He sells fraudulent high-quality goods at the familiar (pre-debased money) price.

You can understand how tempting the third decision is. The government is not enforcing the law of honest weights and measures against corrupt silversmiths. Silversmiths who don’t practice corruption cannot get the government to step in and stop the deception of their competitors. Their competitors make more profits, and the honest ones eventually go out of business, or begin to imitate the corrupt silversmiths.

Once the silversmiths are all (or mostly) corrupt because of the corruption of the rulers, the other producers face a problem as individuals. Should they raise prices? Should they instead cut profit margins, but try to sell high-quality goods at the older, familiar price? Or should they follow the lead of the corrupt silversmiths, and start debasing the quality of their products?

Isaiah’s condemnation of Judah indicates that the winemakers had fallen into the same corruption as the silversmiths. They were pouring water into the wine.

Step by step, the debasement of money provides incentives in the short run for deception. The sellers are tempted to deceive the public. But remember, the public wants to be deceived. The public wants to believe in something for nothing. The public is crooked, too.

Something for Nothing

The worker who is employed by the silversmith says to himself, I want a raise. I see that my boss is corrupting the silver, and he is pocketing the profits. I want “a piece of the action.” He can afford to give me a raise. To keep his employee quiet, the silversmith gives him a raise. He, too, gets paid in extra quantities of the debased silver. He, too, can rush out and spend it on goods and services at yesterday’s prices. He, too, has “won.” He, too, has been corrupted.

What does the person do who sells something to the silversmith’s employee? He makes more money. Business has picked up! He orders more goods to sell to the employee next payday. And what does his employee think? “My boss is getting rich by selling goods to these silversmith workers. I want my piece of the action.” So, he asks for a raise, and gets it.

And so it goes, all the way through the economy. Everyone just loves having more money. Everyone loves becoming a bigger spender. Everyone seems to have gotten something for nothing.

Guess what starts happening to prices? Right: they start going up. So, what do customers do? Some pay more for the things they buy. (That’s why prices go up.) But others start looking for bargains: sellers who are “stupid” who keep selling goods at older, pre-inflationary prices. Buyers seek bargains, meaning older-priced goods and services. They want something (discounts) for nothing (lots of debased new money jingling in their pockets).

So, corrupt wine sellers accommodate corrupt buyers. “Yes, sir, a brand-new, 100 percent top-quality item at low, old prices!” Meanwhile, they have poured water into their wine. So do a lot of other sellers.

The quality of many products starts going down. Prices stay artificially low, because in principle people are violating the principle of honest weights and measures—all through the society. “Yes, you get ten yards of 100 percent silk at last year’s low prices.” It’s a lie. Either the silk isn’t 100 percent silk, or it’s an inferior quality silk, or it’s actually seven yards because the seller has substituted a false measure.

Price Controls

But what if the government steps in and tells all the other sellers except the silversmiths to maintain the old standards of quality? Then either prices will rise, or else the amount customers can buy at the old prices will be reduced, or else quality will drop.

But what if the government passes a law against raising prices? This means that sellers can’t cut the amount sold. What then? Quality will have to drop.

What if the government passes another law, making it illegal to cut quality? Then many sellers will go out of business, and customers will not be able to buy all the goods they want.

Meanwhile, risk-oriented producers will start selling their goods in the free market, meaning an unregulated market, meaning the black market.

I hate to use the term “black market.” I prefer to use the term “alternative zones of supply.”

If the silversmiths alone are allowed to debase their product—money—and the government passes laws against price rises or quality cutting, the law-abiding customer and the law-abiding producer will be ruined.

Conclusion

In short, if there is any tampering with the monetary unit, and the government allows such fraud to continue, the whole economy is threatened with a progressive debasement. It is not simply the monetary unit that will be debased, but also many other products. Any seller or producer who finds that his customers are unwilling to accept price increases is forced to consider adopting the same corrupt practices as the silversmiths, just to stay in business.

Thus, a debased currency is like a giant engine of economic corruption. Where the rulers allow, not to mention control, this sort of debasement, the whole society is brought under the temptation of adopting corrupt practices. Because money is the universally used medium of exchange, debasement of money is the most efficient “yeast of corruption” that an economy faces. If governments allow this debasement, to say nothing of getting a monopoly over money and then beginning the process of debasement, the spread of immorality speeds up. Every economic enterprise is tempted to imitate the corrupters in order to stay in business.

Something for nothing in the field of monetary policy eventually leads to disaster. God will not be mocked.

Summary

The process of monetary debasement causes a string of undesirable, yet tempting effects.

1. People could see the debasement of silver, yet there was no opposition.

2. The rulers were corrupt in allowing the debasement of silver.

3. The spread of monetary corruption was not merely passive; evil was widespread in Judah.

4. High quality goods normally cost more to produce than low quality goods.

5. Producers begin to imitate the corrupt practices of money debasers.

6. Continued monetary debasement requires the cooperation of government, meaning coercion (direct or indirect) against honest money producers.

7. Evil and good both spread like yeast (what the Bible calls leaven).

8. Bad money drives good money out of circulation only when the government equates the two by law.

9. The public thinks it benefits from the inflation, at least at first.

10. The public wants to fool sellers into selling at “discount” (honest money) prices.

11. Sellers fool the public by cutting quality and offering them at “discount” prices.

12. The corruption spreads from employers to employees.

13. Government-legislated price controls are in fact “people controls.” They control the decisions of people, not prices as such.

14. Government price controls reduce people’s wealth by destroying the free market.

15. The “black market” is simply the product of people who are trying to escape dishonest money in a world of price controls.