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Henry Hazlitt

Economics In One Lesson

 Inflation

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... it seems desirable to ask why inflation has been constantly resorted to, why it has had an immemorial popular appeal, and why its siren music has tempted one nation after another down the path to economic disaster.

• The most obvious and yet the oldest and most stubborn error on which the appeal of inflation rests is that of confusing "money" with wealth.

"That wealth consists in money, or in gold and silver," wrote Adam Smith nearly two centuries ago, "is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value . . . . To grow rich is to get money; and wealth and money, in short, are, in common language, considered as in every respect synonymous."

Real wealth, of course, consists in what is produced and consumed: the food we eat, the clothes we wear, the houses we live in. It is railways and roads and motor cars; ships and planes and factories; schools and churches and theaters; pianos, paintings and books. Yet so powerful is the verbal ambiguity that confuses money with wealth, that even those who at times recognize the confusion will slide back into it in the course of their reasoning.

Each man sees that if he personally had more money he could buy more things from others. If he had twice as much money he could buy twice as many things; if he had three times as much money he would be "worth" three times as much. And to many the conclusion seems obvious that if the government merely issued more money and distributed it to everybody, we should all be that much richer.

These are the most naive inflationists.

There is a second group, less naive, who see that if the whole thing were as easy as that the government could solve all our problems merely by printing money. They sense that there must be a catch somewhere; so they would limit in some way the amount of additional money they would have the government issue. They would have it print just enough to make up some alleged "deficiency" or "gap."...

• ... inflation turns out to be merely one more example of our central lesson. It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run it brings ruinous consequences to the whole community.

Even a relatively mild inflation distorts the structure of production. It leads to the overexpansion of some industries at the expense of others. This involves a misapplication and waste of capital. When the inflation collapses, or is brought to a halt, the misdirected capital investment--whether in the form of machines, factories or office buildings--cannot yield an adequate return and loses the greater part of its value...

... inflation does not and cannot affect everyone evenly. Some suffer more than others. The poor are usually more heavily taxed by inflation, in percentage terms, than the rich, for they do not have the same means of protecting themselves by speculative purchases of real equities.

• Inflation a is a kind of tax that is out of control of the tax authorities. It strikes wantonly in all directions.

The rate of tax imposed by inflation is not a fixed one: it cannot be determined , in advance. We know what it is today; we do not know what it will be tomorrow; and tomorrow we shall not know what it will be on the day after. Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow.

• It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships.

Its inexcusable injustices drive men toward desperate remedies.

• It plants the seeds of fascism and communism.

• It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.