Mises on Inflation

Antony — March 10, 2012

I am currently in the process of reading Ludwig von Mises’ groundbreaking work The Theory of Money and Credit. Though originally published in 1912, it is amazing how many insightful and relevant points are made in the book that are directly relevant to modern day political and economic issues.

I was particularly struck by a paragraph in the section on Inflationism. In this passage, Mises describes the anti-democratic nature of inflation. How inflationary policies allow governments to fund projects which would otherwise not have public approval. And how the consequences can be concealed, as the resulting price rises are blamed on evil capitalists and speculators.

“A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.”

This passage explains why libertarians, such as Ron Paul, get so agitated about central banking. It is because centralized control of the money supply facilitates inflationary policies that in turn empower governments to act outside the constraints of public opinion. It enables governments to pursue unpopular and expensive polices. Inflation permits unfettered war and welfarism. It steals from savers, hurts the elderly and poor on fixed incomes, and destroys the middle class. Inflation impoverishes society by disrupting capital investment, creating malinvestment, and thereby reducing economic productivity. Inflationary policies create the boom-bust cycle we are currently suffering through.

Mises understood this 100 years ago. If only our modern day politicians and economists would listen.

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