Index debts and contracts to cure inflation

From a three page paper sent to the Institute.

All debts and contracts to pay money should be indexed. In order to do this the government should publish monthly a multiplication factor showing the value of money compared to its value one month before. At this point any outstanding debt or contract to pay money must be multiplied by that factor. The debts and contracts include wages and salaries, money lent to or by banks, building societies and finance houses, insurance premiums (because the sums to be paid out are to be indexed).

At first sight this seems to be not a cure but an exacerbation of inflation, since it will certainly increase the anount of money in circulation. However, the evil of inflation is its distortion of the way money is shared out in the population. Debtors win and creditors lose, irrespective of any virtue or need they may have. The cure removes this evil, apart from the erosion in the savings of anyone who chooses to keep actual money, instead of lending money to a bank or building society. Because there are such people and they are likely to be poorly off, the government should issue bonds which can be freely bought and sold (but only to the government) and which automatically rise and fall with the index. Another way of looking at the cure is that these bonds are the real money and that they are defined in terms of the country's wealth.

The advantages are twofold:

First, wages, salaries, pensions and fixed rate dividends will keep pace with inflation unless they are explicitly changed, instead of lagging behind unless they are explicitly changed, as now. If workers feel they should be paid more in real terms, or employers feel their workers should be paid more or less, they may negotiate, knowing that they are dealing with real values. Incidentally, any jealousy over civil servants' indexed pensions will disappear for the nicest possible reason.

Secondly, all savings will keep their value, instead of, as now, being eroded by inflation.

R. W. Jones, 58 New Lane Hill, Tilehurst, Reading RG3 4JP.