Inflation: Its Effects And Failures

Inflationism is that policy which by increasing the quantity of money or credit seeks to raise money prices and money wages or seeks to counteract a decline of money prices and money wages which threatens as the result of an increase in the supply of consumers’ goods.

In order to understand the economic significance of inflationism we have to refer to a fundamental law of monetary theory. This law says: The service which money renders to the economic community is independent of the amount of money. Whether the absolute amount of money in a closed economic system is large or small does not matter. In the long run the purchasing power of the monetary unit will establish itself at the point at which the demand for money will equal the quantity of money. The fact that each individual would like to have more money should not deceive us. Everybody wants to be richer, to have more goods, and he expresses it by saying he wants more money. But were he to receive additional money, he would spend it by increasing his consumption, or by increasing his investments; he would in the long run neither increase his ready cash at all, nor increase it significantly compared with the increase in his supply of goods and services. Furthermore, the satisfaction which he derives from the receipt of additional money will depend on his receiving a larger share of the additional money than others and on receiving it earlier than others. An inhabitant of Berlin, who in 1914 would have been jubilant upon receiving an unexpected legacy of 1,000 marks, did not think an amount of 1,000,000,000 marks worth his attention in the fall of 1923.

If we disregard the function of money as a standard of deferred payments, that is, the fact that there are obligations and claims expressed in fixed amounts of money maturing in the future, we easily recognize that it does not matter for a closed economy whether its total quantity of money is x million money units or 100x million money units. In the latter case prices and wages will simply be expressed in larger quantities of the monetary unit.

What the advocates of inflation desire and the proponents of sound money oppose is not the ultimate result of inflation, namely, the increase of the money quantity itself, but rather the effects of the process by which the additional money enters the economic system and gradually changes prices and wages. The social consequences of inflation are twofold: (1) the meaning of all deferred payments is altered to the advantage of the debtors and to the disadvantage of the creditors, or (2) the price changes do not occur simultaneously nor to the same extent for all individual commodities and services. Therefore, as long as the inflation has not exerted its full effects on prices and wages there are groups in the community which gain, and groups which lose. Those gain who are in a position to sell the goods and services they are offering at higher prices, while they are still paying the old low prices for the goods and services they are buying. On the other hand, those lose who have to pay higher prices, while still receiving lower prices for their own products and services. If, for instance, the government increases the quantity of money in order to pay for armaments, the entrepreneurs and workers of the munitions industries will be the first to realize inflationary gains. Other groups will suffer from the rising prices until the prices for their products and services go up as well. It is on this time-lag between the changes in the prices of various commodities and services that the import-discouraging and export-promoting effect of the lowering of the purchasing power of the domestic money is based.

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Ludwig von Mises was the acknowledged leader of the Austrian school of economic thought, a prodigious originator in economic theory, and a prolific author. Mises's writings and lectures ...

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