A Fatal Weakness in the Fight against Inflation

banking systems composed of banks as profit-seeking entities

Photo by Old Money on Unsplash

Money, once created, remains in the (global) economy forever, permanently increasing the supply of money. Money is a source of inflation to the extent that it is being used as a medium of exchange. Money held in accounts represents potential inflation.

To reduce with certainty the amount of money that can be available for exchange, it must be captured and held by banking systems. Any other entity holding money is free to disburse it. The higher the rate of inflation is, the greater the disincentive to hold money in an account is — so the more the money in accounts gets utilized and that potential inflation realized.

As with any business enterprise, a bank must make profits or fail. As the employment of money to make money is the primary way banks make profits, the pressure on central banks to minimize the reserves of money that banks are required to hold is all but an imperative.

As with all other entities, the higher the rate of inflation is, the less economic sense it makes for banks to hold onto money. To require banks, as the profit-seeking enterprises that they are, to refrain from employing the money in their control to seek profits, even while the value of the money they hold is evaporating — and returns from previously issued loans are behind the inflationary curve — is to put banking systems in an untenable position.

unaffiliated, non-ideological, unpaid, academically trained philosopher and political economist