Economics in One Lesson

by Henry Hazlitt

The Lesson Applied

The Mirage of Inflation


I have found it necessary to warn the reader from time to time that a certain result would necessarily follow from a certain policy “provided there is no inflation.” In the chapters on public works and on credit I said that a study of the complications introduced by inflation would have to be deferred. But money and monetary policy form so intimate and sometimes so inextricable a part of every economic process that this separation, even for expository purposes, was very difficult and in the chapters on the effect of various government or union wage policies on employment, profits and production, some of the effects of differing monetary policies had to be considered immediately.

Before we consider what the consequences of inflation are in specific cases, we should consider what its consequences are in general. Even prior to that, 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 more than 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.”

Purchasing power is chronically deficient, they think, because industry somehow does not distribute enough money to producers to enable them to buy back, as consumers, the product that is made. There is a mysterious “leak” somewhere. One group “proves” it by equations. On one side of their equations they count an item only once; on the other side they unknowingly count the same item several times over. This produces an alarming gap between what they call “A payments” and what they call “A+B payments.” So they found a movement, put on green uniforms, and insist that the government issue money or “credits” to make good the missing B payments.

The cruder apostles of “social credit” may seem ridiculous; but there are an indefinite number of schools of only slightly more sophisticated inflationists who have “scientific” plans to issue just enough additional money or credit to fill some alleged chronic or periodic deficiency, or gap, which they calculate in some other way.