The Problem of Inflation
One of the most pressing problems in the world today is the “inflation” of currency. In this essay I propose that in moving toward a system of land and resource stewardship embodied in the Community Land Trust model, we are laying the groundwork for a new system of money exchange that is noninflationary, local, and at the same time, universal.
Most economists will agree that the problem of currency inflation is in large part due to the fact that the central banking systems that drive national economies are subject to urgent political pressures such as “national defense,” welfare, or the “urban crisis,” whose costs allow the government to expand the issue (creation) of money at its discretion. This ability of governments, to create vast amounts of money for political reasons, is certainly the major cause of inflation. It marks the beginning of what is called the “wage/price spiral;” prices go up either due to increasing demand created by government handouts to industry and/or welfare, or to workers demanding higher wages to compensate for increasing consumer prices.
Yet another cause of inflation is directly related to land itself. This is due to speculation in land, wherein the speculator demanding unearned (nonproductive) returns for his/her investment forces increasing amounts of capital to be buried in the land. Meanwhile, the speculator with his/her unearned income creates increased pressure on prices of consumer goods without an offsetting increase in production of real goods. To the degree that Community Land Trusts can remove speculation from land and resources, they therefore help to remove inflationary pressure on all consumer prices. Moreover, it has been demonstrated in various parts of the world that only a small portion of land needs to be involved in order to slow or stop speculation. As the effect of speculation is a rather local affair, control of perhaps 5 percent or less of the land (by a local Community Land Trust) is all that is necessary to stop inflation of land prices. Therefore Community Land Trusts do not need to control a very large portion of land in any given locality to have a strong effect on inflation caused by speculation.
At any rate, the root cause of inflation remains the central government’s printing of “political” money. It is the heart of the problem. Clearly, the solution to the problem of inflation is to remove the political incentives for issuing vast amounts of money. Either that, or a totally different approach to the issue of money must be taken. I submit for many reasons that it will not be possible to remove the political motivations of the central governments. One reason is that the business of politicians is to get elected. Politicians will pass huge budget deficits, even if their decision amounts to billions of dollars of inflationary pressure, if their constituents demand it. This behavior is embedded in the political system. For example, has anyone ever seen a president, let alone a congressman or woman, vote against a substantial part of each new national budget increase, even if he/she advocated a “balanced budget” in order to get elected?
It seems obvious then that a new approach must be taken to the issue of money. The very nature of money itself must also be different. How can this be done? I suggest that it must be accomplished at the local level. If we are seriously looking toward a permanent solution to inflation, money must be issued by local communities based on the real production taking place. Otherwise, all “solutions” will merely be political efforts, which if temporarily successful, come at a cost to the poor—usually in the form of welfare reduction.
If a major solution is for local communities to issue their own currencies, how will this work? Would not such a system be even more confusing than the present system, with its some eighty or ninety different national currencies, and all the difficulty of exchange ratios between them? Yes, but only if each community were to issue its own currency separate from other local currencies. But that is not what I am proposing. Instead what I am suggesting is not so different from the present practice within each country. While the central banks and central government control the overall issue of money by entering the money market and buying and selling vast amounts of government securities, local communities, or rather local banks, also issue new money (on a daily basis) through the granting of commercial loans. Thus, it is not a question of local issue of money. Rather, it is a question of whether the money issued should be national currency, or a new kind of currency.
Clearly, if we are to avoid the pitfalls of the present system with its many different national currencies, we must create a local currency, which while issued locally is also a universal currency that can be circulated anywhere in the world. In other words, we must move on the one hand to the local level, and on the other hand to the world level, or toward a world economy as Rudolph Steiner and other philosophers have indicated. How can this be done? How can we create a universal currency, and what is the role of the Community Land Trust in this?
Creating a Universal Currency
First we must recognize the difference between a paper currency, or a fiat currency, and a currency based on some real good or goods. For example all modern currencies or national currencies are paper or fiat currencies; they are not based on any real good or commodity. This is a relatively recent development. Up until 1972, when President Nixon closed the “gold window” and refused to exchange gold for dollars on an international basis, gold continued to play an important exchange role on the international level. Even further back in history, in the 1930s when President Roosevelt stopped payment of gold for dollars to U.S. citizens—and all other countries followed the U.S.’s example—gold was still important. Up until recently, therefore, gold has been the commodity used for exchange; paper currencies were measured in gold—so much gold for a given paper unit, for example ten dollars equals one ounce of gold. To the degree that the exchange of goods related to a real commodity—gold—inflation was restricted, because people could always convert their paper currency in gold (at fixed exchange rates) in order to avoid paper currency inflation.
Even today the practice of purchasing gold continues (although not at fixed exchange rates) in many parts of the world—including the U.S. Last year, Congress removed the restriction on holding gold. But with the removal of the fixed gold exchange ratios, paper currency has been free to inflate at increasing rates. We have seen this happen. Although fixed rates of exchange between paper currency and gold did not entirely prevent inflation, it certainly acted as a deterrent and demonstrates that some basis reality (or in nature) is important for any currency to remain noninflationary. The important thing is that as long as gold remained the measure of value for exchange, it provided a universal form of currency; in effect, an ounce of gold (or its paper equivalent) remained an ounce of gold no matter what on Earth it was exchanged for. Most importantly, in order to have a universal currency, a common measurement or standard is essential, in the same sense that a common measurement of space or weight is essential for economic transactions. At present we have two standards of space measurement and two standards of weight measurement. We must move toward a single standard for economic exchange.
If we are to create a universal currency, we must look to the most universal reality in nature—not merely to gold, which is unequally distributed around the world and is only available to relatively few people. To return to gold as the basis for a universal currency would only be to return to the inequitable distribution of wealth, which in the past, was the reason why national governments finally eschewed gold as the measure of value. We must, therefore, seek a more universal basis for measuring value.
A wide variety of possible commodities could be used to measure value. We could, for instance, use wheat (or rice), probably the most universally needed commodities for human survival. But any single commodity will have the disadvantage that it represents only a part of the total package essential to human or economic exchange. On the other hand we cannot use commodities that do not have a high degree of universal usefulness. If we examine commodities that are universally used around the world, around thirty are essential to world trade. These thirty commodities represent the bulk of three essential categories: energy, agriculture and forestry production, and Minerals. Under energy we find oil, coal, and gas to be most important. Under agriculture and forestry we find grains, cotton, beans, and wood most important. And under minerals we find copper, tin, gold, silver, platinum, etc.
Using a statistical approach we can establish an index of all these commodities weighted according to each commodity’s significance in world trade. Economists have already done this and such indices are available. Thus, the supply and demand fluctuations of any single commodity of world production provides us with a universal measurement for establishing an exchange system fit to build a world economy. Such a concept is not new and has, in fact, been proposed by many economists seeking to find a better basis for an international currency system than gold. It was, for instance, proposed at the famous Bretton Woods conference by two American economists but rejected in favor of John Maynard Keynes’s proposal largely because of the so-called “storage” problem presented by diversified commodity systems.
The “storage of value” is the second problem baffling economists searching for an alternative to gold as a means for establishing an equitable exchange system. Gold became used as a “medium of exchange” because of its superior qualities as a “store of value”; it did not deteriorate with age. Only two other metals, silver and platinum, have the same qualities, and to some degree they have entered into the exchange process for this reason but not to the same degree as gold. Nevertheless, while gold, silver, and platinum have the advantage of storing value, they have relatively limited value in actual use (gold plates, industrial uses, etc.). To base a currency on such limited practical use is clearly not a worthwhile economic objective.
Furthermore, one of the primary causes of the inequity between deteriorating, renewable resources such as farming and forestry and nondeteriorating, although nonrenewable resources, has been our exclusive reliance on gold in the past. To bring these two parts of the economy into equilibrium, we must base the issue of money on the entire range, or “basket,” of renewable and nonrenewable commodities. In fact, we could construct a strong argument to demonstrate that precisely because our exchange mediums (currencies) have been based on nonrenewable resources, we are now facing a world scale crisis, not only in economics, but in the world’s ability to survive continuing industrial pollution on a scale that may result in apocalyptic disaster in the coming years.
The Role of Community Land Trusts in Creating a Universal Currency
The point that paper money is not backed by real commodities may seem somewhat obscure—particularly to most economists, who are not taught to use common sense. The average person, however, can understand it intuitively at least, because it makes common sense. As a matter of fact, in the U.S. there is an organization organized by farmers and economists called the National Organization for Raw Materials, which advocates “100% parity for raw materials in general, agriculture in particular.” The basic contention of this organization, which seeks legislation to establish parity, is that the failure to include raw materials (basic commodities) within the money system on an equal basis with industrial goods is the primary cause of the discrepancies between agricultural products and industrial products on a world scale.
Fortunately, this “apocalyptic disaster” will probably not happen because the “center” will break down (inflation is evidence of this breakdown). In other words, Central governments will be unable to sustain economic growth and the resulting disintegration of entropy will provide the opportunity for the transition to a local and a world economy at the same time. But such a transition will only be possible if we are able to solve the riddle of a locally based and universal money system.
Back to the problem of storage: Why is it important and what is the role of the Community Land Trust in solving this problem? One could observe, for instance, that today’s currencies are not backed by gold or any other commodity and, that therefore, a backing for currency must not be necessary. But we have also observed that a failure to be willing to redeem gold for paper currency is partly the cause of inflation and the failure of fiat (paper) currencies. Furthermore, we also know that the major reason, if not the only reason for the creditability of currency issued by the central government is that most people assume that the central government is “standing behind” the currency, and therefore, continue to place their confidence in it. And it is true, of course, that the degree to which the federal or central government can impose taxes on the country as a whole, it can if it has the political will to do so to back the currency and prevent inflation. The results, however, would be disastrous and throw the country into depression and deflation since the government cannot enter into the real economic process but merely manipulate the symbol—money. And this is why politicians will not risk imposing taxes and “balancing the budget”—even though it would prevent inflation.
Some economists and politicians will insist that there is another way to stop inflation, which is to set up a strict range and price control board to hold down prices. But who will control the politicians who will continue to print money for pet projects, for “defense”, etc.? Does anyone honestly believe that a wage and price control will work without control over the issue of money? Only Hitler was successful with such policies, because he had the power to enforce them.
What we are suggesting here, then, is a method by which we can separate politics from economics. This separation must be made if we are going to have a healthy system. It may even be a matter of survival itself.
In order to create this money system, which is not dependent upon politics and the power of taxation, we must concern ourselves with the problem of credibility. We must ask ourselves whether or not our universal currency will be accepted as creditable if it cannot be redeemed for a commodity, as was formerly true with gold. Put a different way, it could be said that within a local economy, individuals will accept a currency issued locally because they know and trust the people, or bank, issuing the money, while this is not likely to be the case beyond the local level. (We see on an international level that this is why gold remained as an international exchange medium for so long. Nations do not trust each other and, besides, national governments change—often quickly.)
If we agree, then, that some form of redemption is necessary for a non-national, or nonpolitical, form of money, we must ask what is necessary and how can it be accomplished? This is the heart of the problem, because once credibility can be assured, then exchange on a universal basis becomes possible. Now we must consider what is needed for redemption. First, we recognize that redemption is only needed as security and, therefore, serves primarily as a matter of trust and secondarily as a matter of prudence. The greater the trust, the less storage for redemption is necessary.
As to the question of what needs to be stored, it is a matter of preference: for what commodity would people prefer to redeem their paper currency? My assumption is that probably they would prefer gold—for all the reasons it has traditionally been the most desired commodity for storage. It is hard to imagine anyone walking into a bank and asking for so many bushels of wheat in exchange for paper currency. Therefore, any local bank would have to retain some gold for redemption purposes. With the change in U.S. law, this is now possible in the U.S. Nevertheless, while gold would only be needed for redemption, a substantial backing of some relatively nonliquid but fully diversified commodities would also be necessary to back the original issue of money and to retain adequate credibility. Such a “storage” system would represent to some degree the three major categories of energy and agriculture, forestry, and minerals.
In this respect, the Community Land Trust is in a unique position. In theory, at least, once Community Land Trusts are widely spread across the world, they will hold vast rights to mineral, coal, oil, and forestry resources, which represent a considerable energy resource. Most importantly, all of these resources are naturally stored in the ground or in trees. Thus one of the major problems, the cost of storing commodities, which economists have used as an argument against a commodity-backed currency, is avoided with the Community Land Trust as the sponsoring and authorizing organization.
Finally, we must deal with one of the most basic questions: On what basis is money to be issued at all? The simplest answer is, only on the basis of the production of real goods. Only when money is issued on the basis of real production can we insure against inflation. But also, of equal importance is production of goods with social value, meaning those that are not detrimental to the community (certainly not armaments, for example). As long as money is issued on this basis we can, in fact, issue money as it is needed. There can be no “money shortage” as existed in the Depression and during every “recession” of the so-called business cycle. Most importantly, because we included the nonrenewable commodities—agriculture and forestry—in our basket of commodities to back our currency, we can now create as much currency as needed by issuing loans to farmers and factory developers to bring about increased production of food and forestry products, without any inflationary effect. In short, a sound money issue will provide for all our needs (but not our greed).
The Role of the Community Land Trust in a Commodity Based Banking System
We can begin to see the outline of a community based banking system in which the Community Land Trust plays a key, initiating role. Because the CLT (my abbreviation) is a store of resources for the community, it can act as the initiator of a land banking structure. While this might be done through a separate bank authorized by the CLT, the resources of the CLT provide the real basis for such issue. Moreover, the CLT leases its land to farmers and families for housing, commercial, and industrial uses. Such lease income, like the tax income to the central government, also provides the credibility for the establishment of a community bank that issues money (or credit) needed for local production.
It is also obviously true, however, that a single CLT would not be adequate by itself to provide the diversified resource base on which to issue money. Rather, it will require an association of several CLT’s, first on a regional basis but eventually throughout the world.
This may be a long way down the road from happening, and it probably is. But a start may be possible within the foreseeable future as the CLT movement grows and acquires resources . On a small basis, it is conceivable that within the next five or six years, a beginning can be made. It depends on how many people perceive the need and how rapidly the Community Land Trust movement grows.