The hidden cost of inflation: Monetary instability as an engine of wealth redistribution

“ The Evil of High Prices Is Not General Impoverishment. If all prices and incomes rose equally, no harm would be done to any one. But the rise is not equal. Many lose and some gain.
2. Contracts Upset. When prices rise, the creditor loses; when they fall, the debtor loses.
3. Salaries and Wages Slow to Be Adjusted. They rise or fall more slowly than prices. The purchasing power of wages just before the United States entered the war averaged only two thirds of what it was ten years earlier and after the war it was still less. ”

“ In the first place, the situation interferes with the normal distribution of wealth and income. If the level of prices is rising, since nominal interest does not for a considerable time rise enough to compensate, the lender gets back a less amount of wealth or services than he might reasonably have expected. Creditors lose and debtors gain. It should be noted also that all persons with relatively fixed money salaries lose by this rise of prices. When the level of prices falls, on the other hand, creditors and persons with relatively fixed incomes gain at the expense of debtors. ”

“ As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. ”

“ Few gain permanently either from rising or falling prices, for the envious losers contrive in some way to balk them, e.g. by sabotage. Again when prices fall foreclosures are forced which throw the management of industry into hands often ill fitted for the task. In short, in the end, almost every one loses from an unstable dollar. ”

“ When the average of prices falls, the money or currency is contracted.
All business interests are either produce interests or moneyed interests.
A produce interest is an interest in which the owner receives his pay for his labor and the use of his capital in produce.
A moneyed interest is an interest in which the owners of the business receive their pay for their labor and the use of their capital in money.
A farm is a produce interest.
A railroad is a moneyed interest.
If the owners of a produce interest wish any money, they sell their produce and buy money. ”

“ As a fall of prices inures to the benefit of creditors, a rise of prices would inure to the benefit of debtors. If it would be wrong to have legislation favoring the creditor class, so it would be wrong to have legislation favoring the debtor class. ”

“ So, when he says: "The fortune of each consumer is perpetually at war with all that he buys," he should have added again: "The fortune of each producer is incessantly attacked by all that he sells." In the absence of a clear expression of this reciprocity, most economical phenomena become unintelligible; and I will soon show how, in consequence of this grave omission, most economists in writing their books have talked wildly about the balance of trade. ”

“ Every excess causes a defect; every defect an excess. Every sweet hath its sour; every evil its good. Every faculty which is a receiver of pleasure has an equal penalty put on its abuse. It is to answer for its moderation with its life. For every grain of wit there is a grain of folly. For every thing you have missed, you have gained something else; and for every thing you gain, you lose something. If riches increase, they are increased that use them. If the gatherer gathers too much, nature takes out of the man what she puts into his chest; swells the estate, but kills the owner. ”

“ The merchant or manufacturer, who is calculating whether a 7 per cent bank rate is so onerous as to compel him to curtail his operations, is very much influenced by his anticipations about the prospective price of the commodity in which he is interested.
Thus, when prices are rising, the business man who borrows money is able to repay the lender with what, in terms of real value, not only represents no interest, but is even less than the capital originally advanced ”

“ The agriculturist, the backbone and marrow of the country, spends less money for manufactured products than he netted clear profits by the rise in gold. If the farmer sold now his wheat for six shillings, without inflation the price might have been four shillings, and then the farmer would have been bankrupt, unable to pay the taxes. ”

“ At the same time that the money in circulation thus increases, there is a general return of confidence that increases credit. Not only are there more dollars, but each does more work. Then old enterprises are resumed and new ones are undertaken. The purchase of materials in larger quantities causes a rise in prices and an increase in costs. The surplus labor on the margin of efficiency gets employment, and wages begin to increase. The only classes not sharing in this improvement are the receivers of fixed incomes. As prices rise, the purchasing power of their incomes gradually falls. ”

“ The credit itself, not the form and mode in which it is given, is the operating cause.
§ 3.⁠ The inclination of the mercantile public to increase their demand for commodities by making use of all or much of their credit as a purchasing power, depends on their expectation of profit. When there is a general impression that the price of some commodity is likely to rise, from an extra demand, a short crop, obstruction to importation, or any other cause, there is a disposition among dealers to increase their stocks, in order to profit by the expected rise. ”

“ Under a depreciating standard the recompense of the producer becomes greater and greater, the creditor classes receive a smaller and smaller portion of the products of labor, the profits of industry increase, and consequently production is encouraged and trade and industry are stimulated. ”

“ But in so far as that prosperity is based on a general rise of prices, it is only imaginary. A general rise of prices is a rise only in name; whatever anyone gains on the article which he has to sell he loses on the articles which he has to buy, and so he is just where he was. The only real effects of a general rise of prices are these: first, it straitens people of fixed incomes, who suffer as purchasers, but who have no gain to correspond; and secondly, it gives an extra profit to fixed capital created before the rise happened. ”

“ But if the depreciation of money is a source of gain to the business man, it is also the occasion of opprobrium. To the consumer the business man’s exceptional profits appear as the cause (instead of the consequence) of the hated rise of prices. Amidst the rapid fluctuations of his fortunes he himself loses his conservative instincts, and begins to think more of the large gains of the moment than of the lesser, but permanent, profits of normal business. ”

“ In a short time wilder schemes than ever will waste our capital. Then good-by to general respect for honest labor, for getting rich through speculation and gambling, without work, will be more popular and seductive than ever. Good-by reduction of indebtedness in the business community, and contraction of credits. The credit balloon will be strained soon to the bursting point again. That is your “return to specie payments by prosperity through inflation.” ”

“ Every period of inflation is followed by a loss of confidence, a shrinkage of values, depression of business, panics, lack of employment, and widespread disaster and distress. The heaviest part of the calamity falls on those least able to bear it. ”

“ If the money supply is increased, money is cheaper, and wages go up, so it is easier to get money and pay your debts. But the creditor loses correspondingly, because he cannot buy so much goods with the money he gets; thus, for the government to put more money into circulation, is to cancel a percentage of all debts. But on the other hand, if the amount of money in circulation should be reduced, money will be harder to get, and it will buy more goods ”

“ The greater the inflation, the greater the distance between prices and wages. And who does not know, when the crisis in 1873 came, that work stopped and wages went down a good while before the cost of living did? And who had to lose the difference? The laboring man. What follows? Of all agencies which human ingenuity can invent, there is none that so insidiously robs human labor of its earnings and makes the fortunes of the poor man the football of the rich, as a currency of fluctuating value. ”

“ The consumer is always the loser.
Inflation burns the economic candle at both ends. The off end belongs to those who are being stripped of the value of their earnings and savings by rising prices. The near end belongs to those who are spending the values extracted from the public. They are spending other people's money. ”

“ That a “Worker may Gain More by Having his Industry Protected than he will Lose by Having to Pay Dearly for what he Consumes. A System which Raises Prices all round—like that in the United States at present—is Oppressive to Consumers, but is Most Disadvantageous to those who Consume without Producing anything, and Does Little, if Any, Injury to those who Produce More than they Consume.” ”

“ If, for instance, men arranging for loans in April, 1862, to be repaid a year later, had known that in the meantime the purchasing power of money would decline 30 per cent., they would have agreed upon a very high rate of interest. Men able to discern the future course of prices would not have lent money at the ordinary rates, and if the rates prevailing in the New York market throughout all 1862 and 1863 were less than 7 per cent., it must have been because the extraordinary rise of prices was not foreseen by borrowers and lenders. ”

“ Real interest rates skyrocket because in an environment of negative inflation, even a zero interest rate is high in real terms. Investment and production slump – inventories shoot up, further depressing prices. The decline in output is accompanied by widespread bankruptcies and by a steep increase in unemployment. The real value of debt increases. Coupled with declining prices of assets, it leads to bank failures as a result of debts gone sour. It is a self-perpetuating state of affairs and it calls for the implementation of the seventh and last phase of the cycle. ”

“ Such fall of prices has destroyed the profits of legitimate industry, injuring the producer for the benefit of the non-producer, increasing the burden of the debtor, swelling the gains of the creditor, paralyzing the productive energies of the American people, relegating to idleness vast numbers of willing workers, sending the shadows of despair into the home of the honest toiler, filling the land with tramps and paupers, and building up colossal fortunes at the money centres. ”

“ On the other hand, when prices are falling 30 to 40 per cent between the average of one year and that of the next, as they were in Great Britain and in the United States during 1921, even a bank rate of 1 per cent would have been oppressive to business, since it would have corresponded to a very high rate of real interest. Any one who could have foreseen the movement even partially would have done well for himself by selling out his assets and staying out of business for the time being. ”

“ Falling prices discourage enterprise, although, if all facts were known to the bottom, it might be found that capital was being accumulated in successive periods of production.
It is also true that a depreciation of the money of account, while it is going on, stimulates exports and restrains imports.
But who can tell how we are to make prices always go up, unless by constant and unlimited inflation? Who can tell how we are to avoid fluctuations in prices or eliminate the element of contingency, risk, foresight, and speculation? ”

“ In addition, therefore, to the contraction in the amount of circulating medium operating directly upon prices, we have a rapid and excessive rise in the rate of interest, proceeding step by step with that contraction, till, ultimately, as the Bank reserve approaches to the verge of exhaustion, a state of general discredit arises; the hoarding of currency at once ensues, a still more ruinous decline in prices is the59 consequence, and nothing but the suspension of the Act can avert the spread of universal panic. ”

“ So the leaven of the law works its way through all society. The payments cannot be made out of these reduced means, the loss of the credit follows the loss of the money; the means of exchange, employment, and consumption are destroyed, and the world looks with amazement on the consummation of your work—the wealthiest nation in the world withering up under the blight of a universal insolvency; an abundance of all things beyond compute, and a misery and want beyond relief. ”

“ The evil involved in the forced sales of property caused by inflation is the readjustment of prices through which it is accomplished, and the depression and, sometimes, panic which follow. When the prices of many kinds of property must be greatly depressed in order to induce their transfer to other hands, the machinery of commerce and industry is thrown out of adjustment and is sometimes rendered temporarily useless. ”

“ And that is all that the "economic planner" has accomplished; he neither controls consumption nor regulates production by his counterfeit operation. Until his trickery is discovered, Society has been robbed of some of its output; but the robbery, when discovered, undermines confidence in the market place, discourages production (and therefore consumption) , until Society insists on the correction of the wrong done it. The net effect of inflation, of cheapening the value of money, is to retard man's pursuit of happiness. ”