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by Neville Kennard, veteran preaching and practising capitalist

The Federal Government through its money creation arm, the Reserve Bank of Australia, has a monopoly on the issuance of legal tender in Australia. Legal tender laws make it illegal for other institutions to issue “money”, and they require accounts to be paid in this monopoly currency. Prices must be marked and quoted in Australian dollars and accounts settled in this currency.

There have been times when gold was the currency; old Australian gold sovereigns are still available now from coin dealers and attract a “collectable” premium. Silver too was part of the Australian currency; up until 1946 coins — two shillings, one shillings, sixpences, threepences were 92% silver. Since then we have had the change to decimal currency and the government monopoly issuer of money has had no precious metals in its coins since then, except for the 50 cent coin until 1966 when it was 80% silver. They took the change to decimal currency to be able to take away the precious-metal discipline and constraint that was imposed by gold or silver.

As the government has steadily inflated by increasing money supply the purchasing power of its monopoly money has declined, and in 1991, it discontinued the issuance and use of the one cent and two cent coins. Prices are rounded up or down to the nearest five cents. And even now a five cent piece (made of 75% copper and 25% nickel) is of little value in buying much. Within the next ten years it is likely that the five cent coin will be discontinued, thus making a ten cent coin the smallest denomination. So in just 50 years the government will have depreciated the value of its money by 90%!

Since I was a boy the government-issued money has declined by about 95% -97%. Something that cost one shilling (ten cents) will now cost about $3. My “Milk Shake Index” bears this out. Petrol, Bridge Tolls, Bread … almost anything that is the same item or service of 50 year ago is now about 30 times as expensive. My first pay packet as a seventeen-year-old was Four Pounds and Ten Shillings — Nine Dollars in today’s money. I doubt if you could employ a 17-year-old store man now for thirty times that, say $300 a week.

Mostly we don’t notice it so much as our incomes rise accordingly. Prices creep up, our income creeps up, our assets, like a house, also reflects the creeping inflation, so our purchasing power tends to be maintained.

But there are people who suffer and are disadvantaged and de-incentivised by this creeping inflation, and these are the people on the bottom of the ladder. Poor people have little in the way of assets. At most they may have a bank account with some money in it. If a poor person saves, when he goes to buy something with his carefully accumulated savings in his bank account, he will find it has eroded in value since he started saving. The motivation then is for a poor person is to “give up” his quest to save — for a rainy day or a modest investment.

Reserve Bank and government bureaucrats and politicians are probably steeped in Keynesian economics. They believe in a bit of inflation. The unintended consequences of their interventionist economic policies, now discredited in any good Austrian economic teaching and policy, are not appreciated. Governments with there electoral cycle mindset and short-term horizon have scant regard for unintended economic consequences; they just look for short term electoral consequences.

Inflation is good for debtors, not so good for creditors. If we have borrowed for our home, as we pay it off over a twenty or thirty year period we find the re-payments get easier as our debt has declined in real terms. While this may be pleasing for borrowers whose asset has maintained its value, it leads to some mal-investment by over-investment in housing.

For most people their major asset is their home, and with the tax incentives (capital gains tax free) the incentive is to over-invest in their home. Thus other investment opportunities, productive investment, is starved of capital. Businesses find it harder to raise capital or to borrow than they would if this pool of capital were available and seeking a productive home. Business investment is more productive than housing investment. Business investment can produce profits, employment, capital creation, goods and services that benefit consumers, not to mention tax-production.

This over-investment in housing is an unintended consequence, too, of the government’s fiat money and inflation policy, and its tax policy.

If a private company or an individual acted as fraudulently and monopolistically as our government does, such people would quickly be in court and in jail.

As the fear of inflation increases in these uncertain times, people go to gold or something “real” and we see the price of the yellow metal rising some 400% in the past 15 years (in paper money terms, that is). In real terms, gold over time simply matches and reflects other prices or people’s expectation of what that price may be. Gold can be trusted; government-issued monopoly fiat money can’t be trusted.

The government inflates their monopoly paper money because it is a hidden, hard to discern tax. They inflate when they have taxed all they dare, borrowed all they can get, yet still have spending to do. We can expect for the next several years of economic uncertainty for governments to be printing and spending. So be careful of the surreptitious erosion of the value of your savings.

(in order of appearance on Economics.org.au)
  1. Welcome from Neville Kennard
  2. Think Tanks Don't Work
  3. "Market Failure": Just what the government ordered!
  4. The Tragedy of the Tax Pool Commons
  5. Corporate Welfare
  6. Citizenship for Sale?
  7. I Don't Vote
  8. Voting: Right or Privilege?
  9. Stockholm Syndrome and our Love-Hate Relationship with Government
  10. Civil Disobedience: The Rules of Engagement
  11. Should Respect for Law Extend to Bad Laws?
  12. Jaywalking as a Demonstration of Individuality
  13. Government Likes War
  14. Collusion is Our Right
  15. Why Not the Drug Olympics?
  16. Unconventional Wisdom
  17. Tiger Farming: An Alternative to Extinction
  18. Looking Backwards: Mont Pelerin Society Conference, Sydney, 2010
  19. Tax Avoidance is a Patriotic Duty
  20. Kennard Writes to IPA Review Editor
  21. Genocide by Welfare: A Tragedy from the Aboriginal Welfare Industry
  22. Separating Sport and State
  23. Your Home is Not an Investment
  24. Dick Smith, Celebrity Philanthropist
  25. A Libertarian's New Year's Resolution
  26. Extend Politicians' Holidays to Create Prosperity
  27. Entrepreneurs are Disruptive, and Bureaucrats Hate It
  28. What is a good Australian?
  29. Governments Like Employment But Hate Employers
  30. The Market Failure Industry
  31. Neville Kennard: The Tax Avoidance Imperative
  32. Wot if ...?
  33. The Tribal Chief and the Witch Doctor
  34. The Tannehills
  35. Democracy versus Property Rights and Prosperity
  36. Government Doesn't Work, and That's the Way They Like It
  37. Minarchy vs Anarchy
  38. Euthanasia and Self-Ownership
  39. The Right Policies to Fix a Depression
  40. Is Howard Our Best PM?
  41. Tax Producers vs Tax Consumers
  42. Where There's a Queue, There's a Business Opportunity
  43. Authoritarian Freedom
  44. Why Classical Liberals Should Debate Anarchocapitalists
  45. The Tyranny of the Majority
  46. If you could choose to whom you paid your tax
  47. Business Should Exploit Boat People
  48. The Immorality of Trade Unions
  49. "America" vs "The United States"
  50. Sweet Anarchy
  51. The Illusion of "Job Creation"
  52. Gold Is Money
  53. Guilty Capitalists
  54. Bureauphobia
  55. Prosperity vs Growth
  56. Capitalism vs Democracy
  57. More people = More fun
  58. Self-Ownership - the very idea!
  59. Government will murder Neville Kennard if he doesn't back away
  60. The Australian Dollar Has Been Cowardly and Criminally Devalued, Harming the Poor Particularly
  61. Is Taxation Theft and Government a Tax Cheat?
  62. My Journey to Anarchy:
    From political and economic agnostic to anarchocapitalist
  63. Government Needs Bad Guys –
    that's why they like wars
  64. What Is Obscene?
  65. Traffic Economics
  66. Wayne Swan stands on the shoulders of other intellectual pygmies
  67. Neville Kennard Obituary
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