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Matt Nolan takes a final look at tax and explores 'monetary financing', and ramping up the inflation rate as a form of taxation

Matt Nolan takes a final look at tax and explores 'monetary financing', and ramping up the inflation rate as a form of taxation
The final in our series on tax.

By Matthew Nolan*

After a long period discussing tax, we are now up to the very last tax article !

The last type of taxation we are going to discuss is inflation tax.

Now to do this we cannot just say “inflation is bad”.

In truth, we need to ask how policy actions related to inflation and monetary policy can function as a tax, and why (as a result) economists often tend to steer away from forms of inflation taxation and direct money financing of deficits when discussing optimal tax policies.

Inflation in the context we are describing is persistent growth in the general price level – think of it as the way the real buying power of money declines, relative to goods and services, through time.

In 1978, Stanley Fisher and Franco Modigilani stated the following:

There is no convincing account of the economic costs of inflation that justifies the typical belief -- of the economist and the layman -- that inflation poses a serious economic problem, relative to unemployment

To be fair Fisher and Modigilani then go on to discuss many of the costs that are involved in a fairly sophisticated way. When I studied undergraduate economics I couldn’t appreciate these costs, with appeals to “shoe leather costs” and “menu costs” from inflation sounding overstated. If the increase in inflation also increased nominal wages then what was the problem?

In the end, the argument always seemed to be a call that “any drop in unemployment from boosting inflation is temporary, while the costs of higher inflation are permanent”. 

While this is all well and true, it came off as a very uncompelling argument – I was not convinced it mattered.  So while this is the argument you’ll often hear, I intend to flesh the details out a little more here in a hopefully accessible way.

Eventually I was taught a different way to think about the issue of inflation – by using the framework we have discussed for tax, and as a result considering what specific policy choices about money financing would have on the underlying distribution of goods and services!

Monetary policy, inflation, unemployment, and co-ordination

Before we can clearly think about issues involving inflation, we need to briefly think about the macroeconomic situation more generally. 

Previously the forms of taxation we’ve discussed, where there has been a focus on the long-run, and in the case of externality taxes where the markets of interest are small relative to the economy, focused on microeconomic arguments.  Now “microeconomics” does not mean small, it can indeed be over an entire economy (the idea of general equilibrium) – and it offers the logic we would like to use to understand the issue as a tax.

But inflation and money are a macroeconomic phenomenon.  The difference with “macroeconomics” is that it involves thinking about concepts that are aggregations of smaller components, but that we may not be able to easily break down.  The key macroeconomic variables we think about are inflation, money supply, unemployment rates, and gross domestic product.

Microeconomic arguments underlie these macroeconomic ideas, but ultimately as macroeconomists we recognise that individuals are making choices relative to these macroeconomic variables (as well as other things) and their expectations about them.

In that context, government policy can help to co-ordinate expectations about all these different macroeconomic variables.  Note:  A neat way of looking through one of the channels this runs through has been discussed recently here and here.

The debates within economics have led to a broad agreement that targeting a rate of inflation, which is anticipated by private individuals, and ultimately realised by their choices and the choices of an independent central bank will serve this role. While unemployment and GDP may be influenced by factors outside of our control (changes in the skills firms require to make products, droughts, changes in technology), inflation and the associated predictable change in the price level can be set so private individuals can make choices with more certainty.

An independent central bank can credibly commit to doing this, and given the information available the central banks in Australia and New Zealand have done an incredible job at smoothing out movements in inflation and as a result preventing excessive drops in employment and economic activity.

As a result, we will take as given that we have an independent central bank directly dealing with this idea of co-ordination – something you may have heard called “demand management” or “flexible inflation targeting” by many people.  Other types of rule following co-ordination policies are sometimes mentioned such as Nominal GDP targeting – however, for all intents and purposes any such rule based policy is based on helping with this overall co-ordination of expectations where practicable.

Given this, what happens if the government turns around and tells the central bank that they want to lift spending and they want it to be financed by central bank funds?

Unanticipated monetary stimulus

Assume that we are in a world where there is inflation targeting, such that the central bank has set a time path of interest rates that it view as, given current information, appropriate for the economy.

Then the government decides that it wants to temporarily increase spending, and it wants the central bank to fund this for them.  In this context, the government is solely interested in increasing the goods and services they produce/transfer – but exactly how this is paid for will end up being determined by the central bank.

There are two ways the central bank could deal with this sudden claim:

1. Recognising that they are following an inflation target, and that they are currently on track, and so they will sterilize the bond purchase they are making from the government.  The goal here is to avoid an increase in the money supply, and they will do so by increasing interest rates on the private sector.

2. They could abandon their inflation target, and make an unsterilized purchase of government bonds.  In this context, this will lead to a short term increase in both inflation and output – but in the medium term output will ease back and inflation will remain higher and more volatile.

In the first case, the central bank sticks to its guns and will have to hike interest rates.  The higher interest rates make labour, capital, and land available for the public sector to use when making its own goods and services.

In the second case, the central bank has broken their word about inflation targeting – however, everyone was choosing what they will do based on the expectation that the price level would rise at a predictable rate.  Given this, the sudden lift in government demand places upward pressure on demand for labour, capital, land, and the commensurate private goods and services used to compensate government workers. 

Given it is unanticipated, this is initially taken as higher demand for specific goods and services – leading to firms trying to get machines to run for longer and workers to stay in a bit longer than they would have previously.  However, once it becomes clear that other prices are rising, firms pull back to more “normal” levels of activity.

It both of these contexts we have a form of tax, and both can be seen as a form of inflation tax – ultimately, the government’s decision that they would money finance works by “crowding out” both private sector activity and individual’s leisure/outside opportunities.

An important note about the higher level of output that occurs here – this is not necessarily a benefit.  In fact, having output that is “too high” is a cost.  Remember, people have to work longer hours based on the fact they expect higher remuneration than they end up getting.  Firms are open longer expecting higher larger profits.  Having to work longer is a cost, a cost that these individuals and firms were tricked into taking on due to unanticipated inflation.  This work, for lower than anticipated real pay, is in fact part of the cost of the tax!

Note:  Again, the central bank is managing the “demand” side of the coin here.  Given it takes significant time for government programmes to get going, the fact that unemployment is elevated at a point in time does not imply there is a free lunch from money-financed expenditure now.  However, this is an additional justification for having “automatic stabilisers” in place, such as a welfare system, as we do in New Zealand.

Loss of credibility, loss of benefit

The government above only temporarily increased spending, and the central bank only allowed a temporary one off increase in the money supply.  As a result, why do we suddenly get higher and more volatile inflation?

Effectively, the central bank has lost credibility in such an environment – by showing it will bow to the whim of government financing, firms and households know there is some positive chance that the central bank will do it again.  It will change expectations

As a result, firms and workers will increase their prices and wages a bit more than the target rate of inflation by the central bank, in order to protect themselves against future central bank actions.

It is in this context that we get the social costs of inflation being more permanent than any perceived benefits.  This is a compelling cost that exists in excess of other form of tax financing – and it is this credibility factor combined with the lack of transparency around a “money financed” form of taxation that leads economists to generally suggest other forms of taxation instead.

But it stops borrowing!

Wait a second here, we have to be clear about the difference between funding with borrowing and funding through taxation.

When the government borrows off its own citizens, it is increasing its claim on inputs, goods, and services now and reduce them again in the future.  When the government temporarily increases taxes and then cuts them, it is increasing its claim on inputs, goods, and services now and then reducing them again in the future.  In that way the difference between borrowing and tax is the determination of who is sacrificing inputs, goods and services such that the government can use/transfer them.

Some may say that it reduces borrowing from overseas – but this is a fallacious view, suffering from the “fallacy of composition”.  In this way it is a much bigger logical leap than it sounds at first brush.  Evidence suggests that government consumption and transfers, even when funded through taxation, lead to greater national borrowing. 

Ramping up the inflation rate as a form of taxation

However, one off monetary financing is not the only way that the government can introduce a tax. Another type of inflation tax is called “seigniorage”.

In this case, a set inflation target could well be consistent and anticipated, but its existence cuts the value (in terms of real goods and services) of fiat currency at a constant rate.  Greg Mankiw (1987) discusses the idea of optimal seigniorage, noting that it is a distortionary tax in the same way factor and consumption taxes are.

This implies that the choice of an inflation target is, at least partially, the choice of a tax rate in the New Zealand economy. As a result, the gradual increase in New Zealand’s inflation target has been akin to a slight increase in real tax rates.

[Note:  There is the additional idea of fiscal drag which is separate from this.  Fiscal drag captures how inflation and a progressive tax system interact.  A progressive tax system has a number of “tax thresholds” that are set in terms of nominal income.  As inflation increases nominal incomes (for the same real income in terms of the goods and services it can buy) this implies that more and more people will move into higher tax brackets – and so pay a higher income tax!]

Paying seignoiorage can be avoided by those who can protect their wealth and income.  If the inflation rate can be guessed with a fair amount of accuracy, people will increase the price they charge for assets, and the interest rate they demand, given knowledge of this inflation rate.  Workers will try to protect themselves by including some type of inflation adjustment in their wage demands.  Most broadly this type of inflation tax works by pinging groups who are unable to easily pass on inflation when it comes to setting prices and wages!

A further important point here is that seigniorage works as a tax on “non-interest bearing assets”.  However, since the 1980s the institutional structure of the banking system has changed a lot – it is now possible to get on call accounts that would offer a small rate of interest, a nominal rate of interest that could in turn adjust to account for rising inflation. 

If we’ve move to a situation where all additional saving and borrowing is “inflation protected” then the ability to raise seigniorage revenue is becoming more limited.

It is always and everywhere about goods and services

No matter how much people talk about money, interest rates, inflation, and exchange rates these things only truly matter in terms of real goods and services.

The lens of taxation helps us to understand how different government policy influence the distribution of these goods and services, and the incentives people face to produce these goods and services.


Post-script:  Given the subject nature of what I have written, I have to note something for those who are planning to say something such as “loans create deposits” and “the money supply is endogenous”.  I appreciate where you are coming from, but I would note that this does not contradict the discussion above.  Loans and deposits are created simultaneously due to supply and demand – and there is a dynamic process that occurs that defines where variables go following a “shock”. 

The appropriate description we use depends upon the shock we are looking at.  Above, we are specifically talking about government swapping borrowing for printing currency, given that capital, land, labour, technology, and entrepreneurship all exist for creating goods and services.  In this context, and given our assumption that the central bank is following a clear and known rule, looking at the trade-offs inherent in the provision of goods and services through the lens of taxation is appropriate!


Matt Nolan is a senior economist at Infometrics. You can contact him here »

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With a floating exchange rate , it beomes difficult to 'tax through inflation" because those in the the know do two things , they borrow domestically and invest offshore in low inflation environments , or they borrow big and invest in local hedge assets  if the "real interest rates " are lower than the rate of inflation thereby giving them an advantage. 

Also , currencies are punished if the authorities allow inflation  , like INDIA for example which is experiencing a currency calamity

Right now we in NZ seem to be in balance if you believe the NZ stats on inflation , then our return after tax is still marginally positive .



Suits the banking industry too.

  I just need to go grab a couple more investment properties, not businesses, the inflation on costs would be troublesome.


 So what happens when we reach peak debt and get deflation?


"Inflation in the context we are describing is persistent growth in the general price level – think of it as the way the real buying power of money declines, relative to goods and services, through time."

Matt... I've always been curious to know how an economist reconciles the differences between the rate of money supply growth and the CPI...

Don't u ask questions when u see money supply growing my 10-15% ...and yet the CPI only grows at 2%....????

It has made me question the whole inflation targeting mechanism.....  In a global world it has made me question the relationship of the CPI to money supply growth andmonetary policy ..( I do notice that the new Reserve bank governor has a much greater focus on the credit aggregates than his predecessor did )

If we import most of the goods that we consume....   then should  we  question the assumption that the CPI really does measure the effects of the declining buying power of money as a result of increasing the supply of money ...???

in regards to excessive money supply growth ....  we have already had that in spades over the last 30yrs..

My point point of difference, to yours,  is that u say inflation is the CPI.... whereas.. I say that inflation is the effects of excessive money supply growth.....  which can manifest in an economy in varied ways as an economy evolves....   In this regard ... saying that the CPI is "inflation", seems myopic in my view...

I'm not having a go at you....   I always enjoy reading what u write...and I'm hoping u will respond , for my own understanding.....  

Cheers  Roelof





Roelof - interesting article at macrobusiness see link below.

I do hope Matt answers your questions above as I too am very interested in his answers.

The US no longer collects or publishes M3 details.…


"Don't u ask questions when u see money supply growing my 10-15% ...and yet the CPI only grows at 2%....????"

So-called economic experts like Matt never ask those questions. It would give the banking system con away. This is how the likes of all RB's fudge the CPI figures to never reflect real inflation and why they purposely exclude house price inflation figures as this would directly show how banks creating money from thin air are the number one currency killer.  

Plus it would highlight the limited lifespan of fiat currencies (30-50) years.  


First para, yes its known as the zero bound trap, classic Keyensian economics.

So yeah sure I can see you believe its being hidden when you dont have an economic model, or a wonky one you rely on.





I think the disconnect between the growth in money supply growth and the CPI index is that the majority of money supply growth is related to credit being provided for the purchase of investment assets (housing, business capital investment) and doesn't directly involve the real economy of goods and services though it does indirectly affect it. I guess investment assets aren't counted in the CPI, because the rise is price is considered a good thing. A rise in value, not a rise in cost. 

On the matter of inflation targetting I've long questioned the merit of economist's arguments defending their view that inflation targeting is a credible tool to control inflation. I think the evidence in its favour is pretty flimsy, even specious. I don't know how they can isolate inflation targetting from the many other variables that influence the long term price level. 

In fact there is some very compelling arguments to the contrary, that it hasn't been as effective as its proponents claim and that the monetary stability and the steady price level is due to a variety of other factors, including government policy settings, low commodity price since the middle of the 1980s, and the insecurity of the labour market due to reforms due to reforms that encourage "labour flexibility". Not to mention the productivity revolution due to the rise of China as the world's manufacturing powerhouse. 

"This evidence, however, is marred by three weaknesses (see, also, Neumann and von Hagen, 2002): the first is that the empirical studies reviewed fail to produce convincing evidence that IT improves inflation performance and policy credibility, and lower sacrifice ratio. After all, the environment of the 1990s was in general terms a stable economic environment, “a period friendly to price stability” (Neumann and von Hagen, 2002, p. 129), and inflation was on a downward trend in many countries, especially developed countries, prior to the introduction of IT; inflation persistence continued to drop  after the introduction of IT (Sikklos, 1999), helped by the increase in the degree of risk aversion to inflation volatility in inflation-targeting countries in the 1990s."   "The mid-1990s is a good test case. New Zealand inflation had been consistently falling in the period to June 1994, and growth had been rising surprisingly quickly. Believing that growth would eventually lead to inflation, the Reserve Bank slapped the brakes on. All the statistics clearly show a rise, not a fall, in inflation for 1995-1997."   I regard inflation targeting as yet another intellectual fashion comparable to the convictions held by previous generations of economist only to be replaced as the current generation passes the mantle onto the next. Classical Economists supplanted by the Keynesians, only to be replaced by the Neoclassical synthesis, then came the Washington Consensus which filled the policy vaccum left by the downfall of their predecessors due to the stagflation of the 1970s which they couldn't explain with their economic model. Now many are beginning to call into question the very basis of the Washington Consus though governments around the world are flailing around still believing that they can still apply its thoroughly discredited tenets to confront the fallout from the Global Financial Crisis which was cause largely thanks to policy makers embrace of those very same doctrines.   One could argue a new intellectual fashion to replace the Washington Consensus because there isn't one currently available which panders to powerful vested interests Keynesianism, the Neoclassical Synthesis, and the Washington Consensus were employed to do in their time. Call me a cynic, but from my reading of economic history one can't fail to conclude that a new economic theory comes along that serves the interests of a rising special interest group in their contest of power with the incumbents.     

Anarkist - very good post.

One important point that you have touched on is "I guess investment assets aren't counted in the CPI, because the rise is price is considered a good thing. A rise in value, not a rise in cost".

I think it is gross negligence to not include a rise in value in the CPI as it leads to enormous distortions. The rise in price/rise in value does lead to a rise in cost if the assets are sold for the new value or borrowed against at the new value. 






hey notaneconomist,

Yes I agree with you that assets such as housing definitely need to be part of price level calculations. Its my view that one of the key pressures on inflation is related to the constantly rising cost of housing, because faced with higher real costs workers have no choice but to demand higher wages. If they're able the employers then pass the added costs onto customers and if its suffciently widespread then it leads to rises in the price level. 

I don't think that higher asset values result in monetary expansion like the Monetarists claim, because its balanced out by the added costs borne by those who are paying for those assets. The extra money spent on the asset would likely have been spent on something else, reducing their consumption. 


If the government borrows it will be in the billions and be for infrastructure such as broadband and roads.

The government will borrow this money over a period of time, say 2 or 3 years so will NOT have an overnight inflationary impact as is implied.

To maintain money supply levels a prudent government would tighten lending on housing and so no inflation.

You can make economics produce the result you want just as easily as statistics produce the result you want


Your analysis is a clever sleight of hand in that it makes modern banking seem legitimate by not examining how it really works.


The central bank is not the main source of money.  I can get siegnorage too and so does anyone increasing their mortgage to buy a house. Money isn't just created by the central bank you know. It is created everytime a new loan is born. It is what allows you to outbid me for that nice house we both want. This is why we have house price booms and busts.


The problem is that over time a great percentage of our future income is sent overseas as profits of the bank instead of back into equity funded productive assets in this country.


"Your analysis is a clever sleight of hand in that it makes modern banking seem legitimate by not examining how it really works.


The central bank is not the main source of money.  I can get siegnorage too and so does anyone increasing their mortgage to buy a house. Money isn't just created by the central bank you know. It is created everytime a new loan is born. It is what allows you to outbid me for that nice house we both want. This is why we have house price booms and busts."


Perhaps he doesn't know how the banking system works Roger. I've read a few economics textbooks and they all appear to teach a totally outdated model of how the money system works, which is discredited by documents produced a great many of the worlds Central Banks and our very own Banking association. 

I don't think the governments nor the Reserve Bank can control the cost of housing in any meaningful way, because it reflects very real supply contraints that afflictt our housing supply. I think only local governments are able to solve the problem by enabling greater levels of development. My fellow environmentalists need to get a clue and realise a better way to manage the adverse impact of development is to encourage or perhaps legislate higher standards not put unnecessary constraints on development.  Yes there would be a financial cost to this, but I think there is a compelling argument that those costs be borne by the wider community/local government, because its the community which would expect developers to comply with those higher standards.




I guess my dislike of his analysis is because it makes theft by deception seem completely reasonable.


A bit of history. I grew up in Britain in the seventies, when rampant inflation was being used to get out from under the weight of unrepayable war debts that Britain ran up in WW2. So the value of the war bonds that people like my auntie ( a nurse in Eygpt and Palestine) had bought was destroyed. People are not stupid, they slowly realised that the only defence was to buy housing. They still think the housing game is about price rises but really it is about the fact that the repayments are in devalued currency. The whole society was destabilised by the effects of inflation. The government stole from its sterling bondholders, public sector unions stole from non unionised workers and pensioners, industry was nationalised and fell apart. The country fell into the clutches of the IMF and and gave up its sovereignty to the US and EU.


So my argument is that Matt conveniently ignores the huge collateral damage his seemingly innocent "taxation" causes.


Interesting, that isnt my and my parents recall of the reason for the 1970s inflation/debt.  In fact here,

Shows the UK's debt, very high in the 1950s had already dropped significantly by the 1970s. The Q has to be asked why then didnt we see high inflation in the 1950s til 1960s if you are right?

Certainly we had high inflation in the 1970s, but I'd suggest that was due to the inept Govns' of the late 60s, early 70s...when they followed quasi-keynesian policies trying to achieve zero un-employment.

I'll agree on savings being destroyed in value....sure...

Taxation, again have a look at tax rates after ww2, most seem to have been quite hight, yet developed countries economies boomed.




I think you're better at the details than me. My thoughts were loosey based on three sources, Modern Britain by Andrew Marr, Rienhart and Rogoff's stuff and Bridgewater's "A Beautiful Deleveraging".  My point was that the article made inflation seem like a pretty innocous form of taxation rather than as a highly destructive one. I guess it's destructiveness is linked to its lack of transparency / deceptive nature. Lenin liked it.


Matt completely ignores the fact that inflation makes increased borrowing the only sensible strategy, which leads to a debt crisis further down the road. He appears to be in the academic camp that has been captured by the specific interests of the international banking cartel.


Don't get me wrong, I like banks, it's just that something somewhere is rotten and I'd very much like to know what.




Well I think there is a difference between mild inflation which I'd hazard a guess at being absolute tops of 5% and 2 to 3 % as ideal and serious inflation say above 7~8% per annum and of course way higher, 15% etc...which is MAtt's point I'd suggest.

Rienhart and Rogoff's 90% debt claim? has been pretty much debunked by the way, so I hope its not part of what you mean.

Im not sure that I follow inflation makes increased borrowing sensible, or its a product of short term need.  So yes I think Gordon Brown's borrowings based on "no more recessions while Im in charge" infame even while in a boom is plain silly, incompeteant if not criminal, he should be in jail IMHO. Yes sure eventually if you keep borrowing you will face a dire situation, ditto printing. 

For short term events however borrowing to cover a tax shortfall due to loss of tax due to a reduction in spending seems to be best covered by borrowing. I mean that "expansionist austerity" has been shown to be a crock of doggy doo doo. Meanwhile careful govn spending on one off infrastructure work is a way to get money into the economy while there is in-adequate private spending to keep the economy from nose diving.

Rotten, yes utterly, worse if we were allowed to look properly and closely I think our jaws would drop, ie many of the big US and EU banks are insolvent and criminally so, except the Govns are keeping them going because they have no other choice.

These look like they could be very interesting, thanks, I'll try and source them to watch.…

Bridgewater's "A Beautiful Deleveraging

might be interesting as well, thanks....





Andrew Marr's series are an absolute delight. They helped make some sense of a totally confusing time.




See section 240.…


Money, and particular mortgages, would fulfil the ingredients for a crime of fraud.


hey Roger,


I totally understand. The talent of economists is that they can make all manner of things seem completely reasonable. Its been a fundamental feature since their branch of philosophy was established.


Its a practice that Alfred Marshall, known as the father of neoclassical economics candidly laid out in the late 19th Century. 


"From Metaphysics I went to Ethics, and found that the justification of the existing conditions of society was not easy. A friend, who had read a great deal of what are called the Moral Sciences, constantly said: 'Ah! if you understood Political Economy you would not say that'" [quoted by Joan Robinson, Collected Economic Papers, vol. 4, p. 129]


Yes. In a similar vein, I was astonished to discover that "survival of the fittest" had nothing to do with Darwin, and was actually put forward by Herbert Spencer to justify the social order of the day. "Survival of the fittest" is actually the exact opposite of Darwin's theory although it is cleverly disguised. "Survival of the fittest" would imply that specialisation would be superior; whereas Darwin found adaptability to be the most important factor.



Then the government decides that it wants to temporarily increase spending,

We have a real world example. The government wishes to rebuild Christchurch, and does not wish to forego spending on everything else proportionately. So somehow or other it has to tax its citizens more. There is no non tax option. What are the options; what are the likely effects, and what might be optimal? There will be some crowding out, but maybe not too much if managed well, given highish unemployment.

1) Increase taxes immediately. Politically challenging, and the effects may well be deflationary and/or employment destroying in an already stressed market place. But in a strong economy this may well be at least partially the best option.

2) Borrow from its own citizens. For which it will have to tax future generations more to pay it back. If there was not a massive hose and leak in the money bucket through private and foreign banks, then this would be money neutral, and so non inflationary you would expect.  For infrastructure, which benefits many generations, and in a strongish economy, this may well be partially the best option. It would increase interest rates, (which is okay for savers), it it weren't for the leaky bucket. And the Reserve Bank can mitigate those if necessary.

3) Borrow from foreigners directly or indirectly. The government's first choice it seems. Increases the money supply; increases the exchange rate. Arguably a double tax; on our existing trading enterprises who take the hit in terms of competitiveness due to the exchange rate; and on future generations who have to pay back the loans. A free gift to foreign trading enterprises.The worst possible option it seems, given it is a double tax.And our current government's favourite. Go figure.

4) Print the money. Possibly inflationary (although few of us seem to understand why it would be more inflationary than letting the banks print the money instead) A tax on savers. But neutral on the exchange rate, so supportive of trading industries, at least until the catch up in wages and prices. In a depressed economy, a very good option. In a strong economy, (with high employment already) best not used until options 1 and 2 are somewhat exhausted. 

On balance, am keenest on 1 and 2. 4 at a pinch. Not option 3. Follow most central banks in the world in other words. 


Your readers might also want a UK slant on this. I've just published a book called 'Inflation Tax: The Plan To Deal With The Debts' which looks specifically at the way the UK government has gained from inflation, particularly since 1945 - namely:

  • Decreased debt burden (the primary benefit)
  • Increased personal tax revenue
  • Extra revenue from saving account interest tax
  • Increased revenue from business taxation
  • Relatively lower public expenditure
  • Taxing people who don't vote (e.g., foreigners)
  • Helping to reduce the burden of other debtors(e.g. mortgage holders and banks)
  • Making GDP appear higher.



Yet inflation has been targetted to keep low....

Low public expenditure? yet the UK NHS came into being in 1948? 6~8% GDP right there...

There will always be inflation or deflation...





Hey Roger,


I wasn’t able to share your experiences because I’m too young to have lived in that era so I can’t truly relate to what you went through. That being said I think you should reconsider who was responsible for the economic upheaval into those years. To fully understand the events that transpired in the early 1970s, one must place them in their proper historical context.


Up until 1971 the British banking system can be characterized as highly regulated and tightly controlled. The government and the Bank of England had employed an array of measures to control the money supply including quantititve credit ceilings, fixed exchange rates, capital controls, and restrictions on banks from entrance into certain markets and involvement in certain financial instruments.


Naturally banks weren’t too happy with this state of affairs because any restriction on credit creation limited opportunity to make profits. Throughout the late 1960s they petitioned the Bank of England to loosen the regulatory straightjacket, which in 1971 they proved only too willing to oblige with the introduction of a raft of reforms known as Competition and Credit Control. The regulars liberalized the financial sector under the mistaken idea that they would be able to apply a measure of control to restrain excessive money supply growth with resort to a single tool, the interest rate. Sadly this conviction proved to be a manifest failure in the United Kingdom as it would in the United States.



“ Fforde was an ironic choice for a lecture on the importance of controlling £M3.

In 1971, he had designed a previous failed attempt to control the money supply,

Competition and Credit Control (‘CCC’ or ‘the New Approach’) − ‘the biggest change

in monetary policy since the Second World War’.7


Since the war, the authorities had sought to control the largest counterpart of the broad money supply (M3), bank  lending to the private sector, with a raft of quantitative and qualitative controls.8


The New Approach swept all of these away. Henceforth, bank lending would be controlled on the basis of cost i.e. through interest rates.”


“This line of reasoning justified a root and branch reform, known as ‘Competition and

Credit Control’, applied in September 1971 (Bank of England, 1971). It replaced

controls on borrowing with competition for credit by means of interest rates. More

important for our story is the intention of breaking down functional barriers between

the clearing bank cartel and other finance companies in order to create a uniform

credit market and allow market forces free rein….Shortly afterwards, the Bank of England gave a strong indication that those

who took liberties with market freedoms would not be punished. CCC was consistent

with Edward Heath’s dash for growth. But instead of an industrial investment boom,

what followed was a consumer boom, with rising property values and imports.

Inflation rose and was followed by widespread industrial unrest. Following the oil

shock of 1973, the secondary banks which had largely financed the boom faced the 15

prospect of failure, and were rescued by the Bank of England. Those who took

excessive risk were bailed out (Reid, 1982).”


A Carter appointee, Volcker’s attempts to use interest-rate increases to slay inflation in the late ‘70s were met with a great deal more inflation. By February of 1980, with the Fed funds rate at 14 percent, gold hit an all-time high of $875/ounce.

The dollar’s aforementioned fall was of course sped along by another major mistake carried out by Volcker just a few months prior. Correctly recognizing the futility of interest-rate targeting, Volcker shed the latter only to make a fateful decision that would drive the U.S. economy even further into the ditch. Put simply, in October of 1979 Volcker began a three year experiment with Milton Friedman’s monetarism.

Instead of targeting the Fed funds rate, Volcker attempted to target the quantity of money with disastrous consequences.