CASACT - MONEY, CREDIT AND FEDERAL RESERVE POLICY CHANGES

Mr. Robert P. Eramo

INTRODUCTION

In October, 1979, the Federal Reserve Board instituted a sweeping policy change. This change of "policy is discussed in this paper, and the possible effectiveness of the new policy is evaluated.

The paper is addressed to an intelligent layman in the insurance industry who may not be familiar with operations of the Amerlcan banking system. As a result, the operation of the central bank, the definitions of money, the author's definitions of'price and monetary inflation, the relationships between measures of money and Gross National Product are all discussed before prospects of the new policy's success is discussed. If the paper appears to be too pedagogical in nature, the author does apologize to the reader. However, the author cannot over emphasize how grave a matter price inflation can be for the insurance industry. An understanding of how the central bank works and what we in fact use as money today can shed light on how price inflation may be controlled.

Inflation is indeed a world-wide problem. At no time in history has there existed a situation when no country is spared the declining purchasing power of its national currency. Even Swltzerland, over the past 15 years, has seen prices rise in terms of its currency. We have become victims of a fallacy that price inflation is an inherent part of civilization. This mistaken view is especially held by young people who have really had no other experience.

Countries affected by high rates of inflation see their middle classes progressively wiped out of their liquid assets. Any semblance of sound credit arrangements is destroyed; and, as a result, additional risk is incurred by business enterprises to finance growth and real productivity increases. In especially severe situations, with the economic voting power of the middle classes destroyed, the void of economic power of the middle classes is substituted with dictators of either leftist or rightist persuasions. Inflation can eventually ruin both individual freedom and democracy.

Keeping in mind the potential gravity of the situation, let us proceed. Please bear with the author through the details. If the paper's conclusions are correct, you will be able to determine from readily
available government data if price inflation is being controlled and to what extent.

INFLATION & INSURANCE

The Property & Casualty industry's indemnity contracts are basicall promises to reimburse parties with money usually after the payment of premium. The delay between receipt of premium and payment of loss can be quite long. Other services llke engineering inspection and risk management more closely resemble the activities of non-financlal corporations; services are more nearly rendered at the time of money transaction. The Life Insurance industry to a far greater extreme defers benefits. It's the deferral period between payment of premium and payment of benefit that gives the insurance industry a vital interest in the maintenance of the general population's confidence of the "store of value" function of money. Needless to say, a Reichsbank-type hyperinflation would destroy the insurance industry..."

Source: www.casact.org/pubs/dpp/dpp81/81dpp152.pdf‎