The official web site of A.H. Lloyd

In addition to being a novelist, military historian, musician and gamer, I also dabble in economics. I think it’s because economics is a lot like gaming insofar as one tries to use simulations to predict real-world results. When I first took classes all those years ago, I immediately grasped it, and had fun moving the lines on the graphs and stuff. Much of game design is about looking at probability and the points used on Conqueror: Fields of Victory are an attempt to quantify the value of various unit attributes.

Thus, while I don’t like to do hot takes on current events, I was fascinated to see that the recent inflation report confounded all of the 60 “experts” who were consulted in advance.

Economics is indeed the “dismal science,” and it’s practitioners are frequently wrong, and this is just as frequently ignored. Marxism famously is considered an economic theory, but it is actually a religious heresy built around the mortal sins of wrath, envy and pride.

Anyhow, when tariffs became a hot topic, I knew two things which have since been born out. The first is that they do not cause trade wars or depressions because tariffs were the norm during the most explosive years of growth during the Industrial Revolution. The Smoot-Hawley Tariff gets blamed for the Great Depression because it allows historians to ignore all the other bad decisions.

The second thing – which apparently evaded both the Panel of 60 as well as the Federal Reserve Chairman – is that tariffs are not inflationary. This is because they are taxes. Taxes lower the velocity of money, they do not increase it. A tariff is nothing more than a tax on imports. Many other countries (like Japan) have stiff tariffs without high inflation. Anyone with eyes willing to see knew this. China also has tariffs, yet is entering a deflationary cycle. How can this be?

This is because when you raise the price of something through taxation, you are actually pulling money out of circulation. Tax things high enough, and the economy will contract, which will reduce the amount of money in circulation. The notion that competitors would raise prices to try to match the tariffs was utter nonsense. Yes, they may have kneecapped their overseas competitors, but the domestic market is very much in play. The only way domestic prices would rise is if there was a monopoly or collusion. But as we saw, domestic producers immediately saw an opportunity to pick up market share and reduced prices.

Inflation is entirely the function of the money supply. Taxes have little to do with it. Consider the example of a sales tax. It raises all prices by a given percentage (in Michigan, it’s 6%). That doesn’t inflate the currency, it cuts consumption because now you get 6% less than you spend. A 10% discount is really only 4%. The higher one raises it, the more one reduces sales. This is widely known.

One sees inflation when government spending surges. This has happened throughout history, long before the adoption of paper currency. In the pre-modern era, kings would tax their subject in actual coins and sometimes in kind. Coins would then be stockpiled against future needs, hence the term “war chest.” When war would break out, those coins would be put back into circulation to buy weapons, pay soldiers, pay for supplies to feed them, etc. Similarly stocks of grain would be released to feed them as well.

What this did was make existing coins (and great) more common, that is to say, cheaper. The surge of money caused all prices to rise, since the pound sterling or gold thaler or livres were freely flowing. Similarly, opening up the royal granaries caused the farmers who used to rely on Army contracts to have sell for less.

Often, war exceeded the contents of the treasury, so loans would be needed. Whether using paper notes or bonds, this added further money, continuing to raise prices. Wars often stopped not because the issue was resolved, but because no one could afford to sustain them. There would then be a treaty, which would last until the combatants had enough money to start another round.

In some cases, the war continued but nothing much happened. When a war ended, the cash flow stopped, and the Crown might raise taxes to recover, which would reduce the money supply. Now coins are becoming less common, and so they are worth more. Deflation now set in, and while it caused some problems, this was usually offset by the advantages of renewed trade and more men able to work in peaceful pursuits. The Crown might lower taxes as the budget stabilized, further promoting growth.

This is why prices remained remarkably stable over centuries. Paper money destroyed that stability because there is no upper limit on the amount produced. This freed governments to run peacetime deficits, which were generally unheard of historically. Typically they were the result of spendthrift rulers who squandered wealth on opulent buildings, monuments to themselves, or stupid stunts. A sovereign running out of money in peacetime was regarded as a failure.

Again, this isn’t some gnostic discovery of mine, it’s been out there forever. I can only conclude that there is a certain amount of motivated reasoning behind getting things so consistently wrong.