Thursday, November 8, 2012

The School of Salamanca and India's Inflation Problem

Recently the RBI governor announced the second quarter review of the monetary policy in which his monetary policy stance was, "to maintain an interest rate environment to contain inflation and anchor inflation expectations".  As Subbarao - the RBI governor - indicated, he is right now trying to find some kind of balance between inflation and growth dynamics [sic]. But his major worry is inflation. Indian economy is facing the problem of inflation, as defined by mainstream economists as "the rise in the general price level", since very long time. Government officials, mainstream economists and media pundits frequently bamboozle the populace with a propaganda, that the major cause of inflation is supply bottlenecks (see this, and this)! This is a hoax. Supply bottleneck has nothing to do with inflation. What these propagandists are talking about is actually price changes, which they erroneously call inflation, and inflation is all about the increase in the supply of money and credit, especially increase out of thin air in the present day fiat paper currency monetary system. Price rise is one of the chief effects of inflation. These knave officials use this wrong definition of inflation deliberately to misguide the public, and to create a smokescreen to hide their own sinister actions of stealing productive peoples' wealth via inflation heist. 

This inflation phenomenon is not new. In this write-up I want to throw some light on the similar events which took place in the 16th century Europe, especially Spain. Studying and analyzing such historical episodes is important to understand today's inflation phenomenon. In the middle of the 16th century, after Columbus conquered the Indies, huge amount of Gold and Silver started to flow back in the Spanish empire. Remember, during those times both Gold and Silver were money. That means, the supply of money increased in Spain, which made every other goods dearer than before this influx of Gold from the new Spanish colonies began. This new problem needed an explanation and the Spanish theologians from the famous school of Salamanca took up this challenge. What these group of people from the school of Salamanca said at that time is very important for all of us in the present time when we are experiencing essentially the same phenomenon of increase in the supply of money. The only difference today is, that we don't have Gold and Silver as money; We have government's fiat paper currency notes circulating as money whose supply is increasing out of thin air due to the loose so-called monetary policies of the central banks. The major cause of price rise, which was identified by these Spanish theologians, is also in operation today in India, and all over the world. Below I am reproducing the writings of some of the major figures of Salamanca school (those readers who want to read more about this school can grab a free soft copy of Marjorie Grice-Hutchinson's wonderful little book, The School of Salamanca). Reading their analysis will help everyone understand the main cause of our inflationary pain today. I begin with Martin de Azpilcueta Navarro. In 1556 he published his book, commentario Resolutorio de Usuras, in which he said:

Third, that (other things being equal) in countries where there is a great scarcity of money all other sale­able goods, and even the hands and labour of men, are given for less money than where it is abundant. Thus we see by experience that in France, where money is scarcer than in Spain, bread, wine, cloth, and labour are worth much less. And even in Spain, in times when money was scarcer, saleable goods and labour were given for very much less than after the discovery of the Indies, which flooded the country with gold and silver. The reason for this is that money is worth more where and when it is scarce than where and when it is abundant. What some men say, that a scarcity of money brings down other things, arises from the fact that its excessive rise makes other things seem lower, just as a short man standing beside a very tall one looks shorter than when he is beside a man of his own height.  

And, the exact opposite of what Navarro said is also true i.e., when money is abundant, bread, wine, cloth, labor etc., are worth more; you have to pay more fiat notes to buy the same amount of wine, cloth, bread etc., now than before the increase in the supply of money. Today in India money - the fiat currency rupee - is worth less because it is abundant due to RBI's loose monetary policy. This same inflationray policy is also the cause of weaker rupee in the foreign exchange market. Tomas de Mercado explained the causes of this weakness or strength of money in the foreign exchange market. In 1569 he published his work Tratos y Contratos de Mercaderes, in which he said: 

The second point is that from Seville on Medina, Lisbon, and any other place, the thing that causes a rise or fall in the market is the abundance or scarcity of silver. If it is abundant the rate is low, and, if scarce, high. Clearly, then, abundance or scarcity causes money to be little or greatly esteemed. 

Clearly in India today, rupee is printed in abundant supply by the RBI, which is causing it to depreciate against other currencies in the international foreign exchange market. And, as Navarro said, this abundance is also making every other economic goods dearer.

Next scholar, Martin Gonzalez de Cellorigo, published his work Memorial de la Politica Necessariay util Restauraci6n a la Republica de Espana in 1600 in which he makes number of good points which exposes many economic fallacies which we see being used today by the government propagandists. Re money as wealth of the nation, he said: 

...This is because we will not understand that true wealth does not lie in the possession of great quantities of gold and silver (whether wrought, coined, or in bullion) which are destroyed as soon as they are consumed, but in the possession of things which, even though they are consumed by use, are yet preserved in kind by the medium of substitution, which enables us to take gold and silver from out of the hands of friends and enemies, just as we have negligently allowed them to be snatched from our own... 

...It is likewise an error to suppose that in good politics the wealth of a State is increased or decreased because the quantity of money in circulation is larger or smaller. 
The same is true with respect to merchandise and foreign trade: speaking generally, Spanish prices are high on account of our large circulation, although our products could find an easy vent if we so desired. But apart from these cases the same may be done with little money as with much, as is well proved by the contracts made a hundred years ago: for a thing that could then be bought for one real is worth fifty today. The Romans were quicker to understand this. When Paulus Aemilius (as the histories relate) brought the gold and silver from out of Macedonia, the estimation of things rose (so Pliny, Plutarch, and other authors say) by a third. And when Julius Caesar caused the spoils of Egypt to be brought to Rome, usury and the exchanges fell heavily and the cost of living rose.

The implication of Martin Gonzalez's analysis for today's India is, that the true wealth of India is not in having abundance of rupee notes and coins! It is in having abundant supply of final consumption goods. And as he said, in India prices are high today mainly because there are more rupee notes and coins in circulation, again due to RBI's lackluster monetary policy. As it happened in Ancient Rome, our cost of living is increasing because RBI is bringing rupee notes into existence out of thin air. Rome had to at least conquer Egypt to bring its money supply - which was Gold and Silver - into Rome, while RBI just have to push few keyboard buttons to increase the money supply out of thin air!!!

Then we have Luis de Molina. He said:

Just as an abundance of goods causes prices to fall (the quantity of money and  number of merchants being equal), so does an abundance of money cause them to rise (the quantity of goods and number of merchants being equal). The reason is that the money itself becomes less valuable for the purpose of buying and comparing goods. Thus we see that in Spain the purchasing­ power of money is far lower, on account of its abundance, than it was eighty years ago. A thing that could be bought for two ducats at that time is nowadays worth 5, 6, or even more. 

There you have it. Molina very clearly cited the reason why prices are going through the roof in India and elsewhere. It is because of abundance of money i.e., fiat rupee notes.

As we can see above, as long as the supply of money is going to rise via RBI's monetary policies, prices will continue to climb and the rupee will continue to depreciate against other currencies. The only solution of inflation is to immediately stop money printing and for that RBI's dismantling is necessary. This politically incorrect work we can not expect from the politicians and bureaucrats. In the end this phony fiat currency system will implode from inside due to very high level of inflation and following deep depression. Common man's focus right now should be only on protecting his wealth from this destruction. 


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