This little vignette written by Don Werkheiser remains one of the best concise explanations of inflation I’ve ever seen. It was published in the spring 1982 edition of Green Revolution, the journal of the School of Living a non-profit organization with which I was associated throughout the 1980s and into the early 1990s. The story helps to elucidate the nature of the dysfunctional political money system that has plagued the world for hundreds of years, but in its brevity and simplicity neglects to mention another feature of the money system that adds to our misery; that is the fact that the “Mayor” and his friends do more than spend counterfeit money into circulation, they have also established “banks” and require that other people who need money to do business must borrow their pseudo-money into circulation and pay interest on it. That enables the bankers to extract even more wealth from the rest of the people while creating an unending and unsustainable expansion of debt. I have articulated that “debt-growth imperative” in my paper titled, the Usury Conjecture.  

An Honest Money Would Stop Inflation by Don Werkheiser

A rural village has no money. All trade is by barter. A farmer comes to town and deposits 10 bushels of corn with a man who has a store room. This operator gives the farmer 10 receipts, each redeemable in a bushel of corn. But the farmer asks for receipts in smaller denominations. The storekeeper gives him 40 receipts for 40 pecks. The farmer trades ten of these corn-receipts for other products; they are each accepted at the value of a peck of corn. That acceptance constitutes the issue of corn notes as money.

Such receipts are generalized credit instruments. They refer to stored corn, but not to any specific peck of corn. When the seller wants a peck of corn the receipt is redeemed. Otherwise it is spent again, and ownership of a peck of corn is conveyed to the next seller. The next day the farmer returns to town and spends 10 corn notes (each of one peck of corn in value) for his wife’s birthday present. Now the farmer has doubled the money supply in circulation, but there is no inflation; there are redeemable goods back of them.

What then is inflation? We must understand “money” and the storekeeper’s actions.

The store room owner noticed that the corn notes were accepted in trade. So he made 40 more “peck-receipts” looking just like corn-receipts and then he spent them into circulation. That is inflation–counterfeit receipts passed as valid receipts. Assume that the counterfeit receipts were accepted at face value. In that case, the counterfeiter effected a robbery of commodities equal in value to 40 packs of corn, while those who accepted them received receipts which measured the extent to which they had been robbed. So long as confidence lasts, the game would continue and receipts could be spent. New sellers would be holding empty receipts. The game would collapse when all the corn in the warehouse was redeemed, and holders of the 40 counterfeit receipts found no one who would take them in trade.

Worse could happen if the counterfeiter had the skills of a politician. If, when confronted by angry holders of his counterfeit receipts he declared himself a benefactor of the community–and showed that the original issue by the farmer was too limited, and that his own issues stimulated industry and trade (he would not mention that the farmers issue was redeemable while his own was not). He noted that most people did not want corn; they wanted a medium of trade that they could use to speed up trade.
More to come.

They were told: “If the game stopped then, the holders would be losers, but if they continued, they could all buy what they wanted. In fact if they elected him Mayor he would declare pseudo-corn-notes to be legal tender, and he’d also begin a program of public works. Soon everyone would be rich.” An ignorant public agreed.

Elected Mayor, the counterfeiter issue another stock of corn-notes called “pecks” and declared them to be worth a peck of corn in the market (but not anywhere redeemable). On each note was a picture of a peck-basket, but what it contained was not specified.  Just a peck of value.

The “pecks” circulated and trade increased. Then a strange thing happened. The Mayor and his agents could outbid everybody for produce and services. They also controlled the printing presses for printing “pecks.” Prices were bid up on the things the Mayor’s group approved. Workers and businessman migrated into those industries for wages and profit. The stock of other things became short. Everyone couldn’t buy what they wanted. People threatened to recall the Mayor if he didn’t improve things. So he issued more “pecks” and then more and more.

The more money people had, the less they could buy. Only the Mayor and his friends had enough — rather too much — money. They gave expensive parties, bought votes, hired police and soldiers; and gave everyone a vested interest in continuing the game, through welfare, social security, profitable contracts, and “peck-funded” jobs.

Confusion resulted. It is evident there are two kinds of money: honest redeemable money and inflatable unredeemable money. These keep our economy teetering between “prosperity” and “depression.” Have we any proof that those in charge of our money system intend to create an honest system? That would break their power. A sound alternative is for people to operate their own money system. American and world history have produced workable patterns; some are underway today.

#   #   #

Take note that the story does not mention any need for gold or silver backing for money to be honest. As E.C. Riegel makes plain in his book, Private Enterprise Money, “When businessmen resolve to set up a money system, they agree to hold in trust for each other goods and services that are pledged against the drafts which they have issued in the form of money. These values — that are held in trust by all for any who may present a money draft therefore — constitute a vast pool, not housed at one place, but scattered throughout the trading sphere. This vast pool of goods and services is the basis or backing for the outstanding money supply. “Reserves” and metal hoards are but window dressing. Only that which is purchasable is back of money.”  

To learn more about honest and effective forms of money and how to create them, see my books, The End of Money and the Future of Civilization, and, Money: Understanding and Creating Alternatives to Legal Tender.