The Appearance of Stagflation

After the discovery of the statistical figures about the money supply and unemployment between 1963 and 1965, I began to read the newspapers from the first of January 1961 and later. Within only a few days it became clear that two decisions made by the Government and the Central Bank were clearly in conflict with each other.

The decision to impose credit restrictions had been made in the beginning of 1963. Earlier in the sixties the country had become blessed with the discovery of extensive natural gas and oil resources within its territory. The Government decided that those resources had to be placed at the disposal of the whole population. Consequently they made the decision to build an extensive natural gas distribution network to every household and industry in the Netherlands.

They began to rebuild systematically every gas appliance in the country from coal gas to natural gas. Special reconstruction teams began to do their job town after town, street after street, until the country had changed completely from coal gas to natural gas.

At the same time the Dutch Government decided to close down its extremely sophisticated coal mining system in Limburg, the southern part of the country. Those kind of country wide total operations are unthinkable to happen within countries like the United States.

Those developments led to the need for substantial capital resources. The statistics told me that the country simply did not have the amount of capital available, needed to develop all the new economic activities related to the development of the oil and gas bounty, given by mother nature.

The credit restrictions of the Dutch Central Bank did not leave much possibility to create new money to close the gap. However, a more in depth research found how they solved the problem.

Thus, they reinvested capital that had already an economic function in another environment. I know, most readers will probably say: So what?

I agree, neither bankers nor the Central Bank give attention to the fact that the total amount of money operating in a market consists of two different types of capital. They see only one dollar or guilder and bankers don't care about the usage of that guilder or dollar.

The reason for this economically extremely primitive approach is the fact that they still look at money in the same way as King Gyges did 650 B.C..

They see a coin that over time blended into a bank note and subsequently into a figure on a computer screen. However, in their minds they still substantiate that figure with the primitive first development of money: the intrinsic coin. I will come back to this issue in more detail in one of the next lessons.

The statistical figures that I found in the Netherlands allowed me to draw the only possible conclusion. The total amount of new investments that they used in the country surpassed the possible means available in the country with more than 10%.

Of course, you can neither use a dollar or a guilder twice. When you begin to use it in environment B, it is not continuing to work any longer in environment A. Consequently, the guilder that became transferred from an existing working environment to a new environment created a new job, probably in the gas and oil environment and eliminated a job in an existing production or service environment. Of course, the ax fell mainly in the middle class environment, with very limited possibilities to find new capital.

Consequently, unemployment began in 1965 to rise, while the country was loaded with work and could easily enjoy full employment. However, the lack of capital kept the country away from full employment. The persons who became forced to leave their jobs because of a suddenly developing lack of capital, id not fit into the newly created work environment. They needed at least retraining.

However, this decrease in already existing production, plus the scarcity of people who could man the new jobs that came available, the constantly increasing need for more capital plus the impossibility to supply that new capital in the form of bank loans, created a totally new economic environment.

They were facing rising prices, while at the same time the economic activity in the field of already existing economic environments diminished.

The Central Bank saw only one thing. Dr. Zijlstra and his staff saw the red burning figures of inflation, because that is how they interpreted the rising prices.

However, the rising prices did not develop from inflation at all. In this case the rising prices developed from a lack of capital, because there was not a trace of inflation. The capital supply was insufficient for the economic activities in the market. Consequently, there was no inflation in the production environment. (We will see what really happened in detail later.) But because they interpreted rising prices as inflation they began to further screw down the supply of capital by continuing the credit squeeze.

They continued this policy for the next twenty years. However, the technological advancements in the country created new economic developments, while continuing a money structure that could not cope with those developments. The same happened everywhere in the Western society.