The Inflation Crisis, and How to Resolve It

20

Inflation versus Morality

During every great inflation there is a striking decline in both public and private morality. Let us look at three outstanding historic examples.

The first is the French assignat inflation of 1790–96. The moral consequences of this have been vividly depicted by Andrew Dickson White in his little book, Fiat Money Inflation in France, which grew out of a lecture he first delivered in 1876.1

With prices soaring and the value of money savings rapidly diminishing, an early effect was the obliteration of thrift. Accompanying this was a cancerous increase in speculation and gambling. Stockjobbing became rife. More and more people began to see the advantages of borrowing and later paying off in depreciated money. A great debtor class grew up whose interest was to keep the inflation going. Workers, finding themselves with less and less real pay in terms of what their wages would buy, while others grew rich by gambling, began to lose interest in steady work. The evaporation of the incomes and savings of the lower and middle classes, and the sudden enrichment of speculators, with their ostentatious luxury, led to mounting social resentment and unrest. Cynicism and corruption set in. Even Mirabeau, who only a few months before had risked imprisonment and even death to establish constitutional government, began secretly receiving heavy bribes. The evidence of the general spread of corruption led to widespread distrust and a loss of faith in patriotism and virtue.

The politicians responsible for the inflation sought to throw the blame, then as now, not only on the “speculators” but on the sellers who were forced to raise their prices. One result was that on February 28, 1793, at eight o’clock in the evening, a mob of men and women in disguise began plundering the stores and shops of Paris. At first they demanded only bread; soon they insisted on coffee, rice, and sugar; at last they seized everything on which they could lay their hands. Hundreds of places were plundered. This was endured for six hours. Finally order was restored only by a grant of seven million francs to buy off the mob. When the plundered merchants had the temerity to protest at the Paris City Hall, they were informed that “shopkeepers were only giving back to the people what they had hitherto robbed them of.”

All this was followed by forced loans, price controls, increased resort to the guillotine, repudiation of the currency, and a final turning to a “man on horseback”—Napoleon.

Referring to our own Civil War inflation and the need to return to a sound money, Hugh McCulloch, who served as secretary of the treasury from 1865 to 1868, declared in his annual report of 1867:

It is corrupting the public morals. It is converting the business of the country into gambling, and seriously diminishing the labor of the country.... The kind of gambling which it produces is not confined to the stock and produce boards, but is spreading through our towns into the rural districts. Men are apparently getting rich, while morality languishes and the productive energy of the country is being diminished.

Upon the demoralizing influence of an inconvertible government currency it is not necessary to enlarge.... It is not to be expected that a people will be more honest than the government under which they live, and while the government of the United States refuses to pay its notes according to their tenor, or at least so long as it fails to make proper effort to do so, it practically teaches the people the doctrine of repudiation.2

It is amazing how closely the French assignat pattern was followed in the great German hyperinflation of 1919–23. We find the same moral and social retrogression: the discouragement and final obliteration of thrift; the rise in borrowing and prodigal spending; the increase in speculation and gambling; the declining application to steady work; the wanton redistribution of income; the consequent growth of cynicism and corruption, of social unrest, bitterness and hatred, and finally of crime. But the details are worth closer inspection.3

A Vast Expropriation

The inflation was an unsettling and revolutionary influence. During most of its course, it lowered the real income of the workers; it impoverished the old middle class of investors, and many of those who had made their fortunes from production; it enriched a new small class of inflation profiteers whose money came from speculation. Under the appearance of feverish activity the country was producing less, and most people were poorer. Goods passed from one speculator to another, through a long chain of middlemen. Some got rich by speculating in foreign exchange; but savings-bank depositors and bondholders were all but wiped out, and even most holders of industrial securities ended with barely a fourth of their original investment. On net balance, in sum, the main profiteers from the inflation were successful speculators rather than producers; this implied an important distinction between the new rich and the old rich.

“It is no exaggeration to state,” writes Bresciani-Turroni, “that the depreciation of the currency caused in Germany the vastest expropriation of some classes of society that has ever been effected in time of peace.”4 The annihilation of the value of the mark meant the confiscation of the lender’s wealth to the gain of the borrower. Landowners, for example, were thus able to free their lands from mortgage. Owners of houses, of course, were able to do the same; but in their case this advantage was usually more than offset by the decline in real rents, which soon did not cover even maintenance expenses, so that many owners were forced to sell.

Pensioners and others who lived on fixed money incomes were reduced to abject poverty. So, in fact, were most of those in the professional and academic classes: students, tutors, writers, artists, scholars. These and similar changes were reflected in the statistics of the condition of children—malnutrition, underweight, rickets. The general mortality rate from pulmonary tuberculosis greatly increased between 1921 and 1923.

Property rights were in fact, if not in form, obliterated. The “revaluation” decrees of February 1924 and July 1925 made only a paltry fractional restitution, and of course could not undo the millions of personal injustices and deprivations suffered while the inflation was in progress.

It is no coincidence that crime rose sharply during the German inflation. On the basis of an 1882 index number of 100, the crime rate, which stood at 117 in 1913, rose to 136 in 1921 and 170 in 1923. It declined again in 1925, when the inflation was over, to 122.

What shall we say of conditions nearly everywhere in 1978? Thanks to Keynesian ideology and spending policies, the universal abandonment of the gold standard, and the workings of the International Monetary Fund, we find inflation in practically every country in the world; and we find a corresponding social unrest, disorder, and moral decay.

The steadily rising crime in this country is an outstanding example. Between 1960 and 1970 our crime rate per 100,000 population increased an average of 8 percent a year, and between 1970 and 1973, 4 percent a year. The total increase between 1960 and 1973 was 120 percent. But crime increase in the last eighteen years has not been confined to the United States; it is reported from most other countries.

Another symptom of moral decay is the increasing frequency of scandal and corruption in government circles. One of the saddest illustrations of this is Great Britain, which during most of the nineteenth and early twentieth centuries stood out among nations for the comparative integrity and incorruptibility of its civil servants and political leaders.

The Causal Chain

The chain of causation, from inflation to corruption to crime, is direct. In a free enterprise system, with an honest and stable money, there is dominantly a close link between effort and productivity, on the one hand, and economic reward on the other. Inflation severs this link. Reward comes to depend less and less on effort and production, and more and more on successful gambling and luck. For some, gambling finally comes to seem too chancy, and corruption or crime a surer path to quick reward.

It is important to remember that inflation by its very origin and nature must involve a redistribution of real incomes. The new money that the government prints goes first of all to special interest groups—to government officials, government contractors (and their employees), pensioners, and various recipients of relief and other appropriations. These groups start to spend the new money when it still retains its former purchasing power. But as they spend it they inevitably raise prices. The last to receive the new money (as one group makes purchases from another) must pay the highest prices.

Those who benefit by inflation, in short, do so, and must do so, at the expense of others. The total losses through inflation must offset the total gains. This creates class or group divisions, in which the victims resent the profiteers from inflation, and in which even the moderate gainers from inflation envy the bigger gainers.

Under inflation, nearly everybody is in fact being subjected to an invisible tax. For if the government in a given year spends, say, $70 billion more than it collects in visible taxes, and merely prints the rest, the public as a whole must be losing the equivalent of this $70 billion in real income. But only a handful of people realize clearly what is going on. The majority tend to blame their plight, not on the government, but on those of their neighbors who appear to be profiteering from the inflation. There is a growing sense that the whole economic system has become radically unjust. “They are stealing from me, and I will steal back.”

It is not merely that inflation breeds dishonesty in a nation. Inflation is itself a dishonest act on the part of government, and sets the example for private citizens. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. Notwithstanding all the pious pretenses of governments that inflation is some evil visitation from without, inflation is practically always the result of deliberate governmental policy.

This was recognized by Adam Smith in The Wealth of Nations, in a passage that bears repeating:

When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.

The pretended payment was inflation. The U.S. government today is paying off in twenty-two-cent dollars the debts it contracted in 1940. Adam Smith went on:

The honor of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.

5 Published, with an introduction by the present writer, by the Foundation for Economic Education (Irvington-on-Hudson, N.Y.), 1959.

6 Men and Measures of Half a Century (New York, 1898), p. 202 ff., excerpted.

7 For a fuller account, see Bresciani-Turroni, Economics of Inflation.

8 Ibid., p. 318.

• 1* Estimated from data through June.
• 2The increase of the circulation has not preceded the rise of prices and the depreciation of the exchange, but it followed slowly and at great distance. The circulation increased from May 1921 to the end of January 1923 by 23 times; it is not possible that this increase had caused the rise in the prices of imported goods and of the dollar, which in that period increased by 344 times.
• 3There was a great decline in labor efficiency. Part of this was the result of malnutrition brought about by high food prices. Bresciani-Turroni tells us: “In the acutest phase of the inflation Germany offered the grotesque, and at the same time tragic, spectacle of a people which, rather than produce food, clothes, shoes, and milk for its own babies, was exhausting its energies in the manufacture of machines or the building of factories.”
• 4For instance, you might drop in at the tobacconist’s for a cigar. Alarmed by the price, you’d rush to a competitor, find that his price was still higher, and race back to the first shop, which may have doubled or tripled its price in the meantime. There was no help for it, you had to dig into your pocketbook and take out a huge bundle of millions, or even billions, depending on the date.
• 57*
• 6Karl Helfferich, Das Geld (sixth edition, Leipzig, 1923).
• 7Economics of Inflation, p. 197.
• 8Lecture, 1942; published in Encounter, 1975.