Part 7 (1/2)

4

Yet the ardor for inflation never dies It would al fro froeneration and country follows the sarasps for the same Dead Sea fruit that turns to dust and ashes in its ive birth to a thousand illusions

In our own day the uet the wheels of industry turning,” that it will save us fronation and idleness and bring ”full eument in its cruder form rests on the immemorial confusion betweenpower” is being brought into existence, and that the effects of this new purchasing powercircles, like the ripples caused by a stone thrown into a pond The real purchasing power for goods, however, as we have seen, consists of other goods It cannot be wondrously increasedmore pieces of paper called dollars Fundas that A produces are exchanged for the things that B produces things that A produces are exchanged for the things that B produces3 What inflation really does is to change the relationshi+ps of prices and costs Theabout is to raise coe rates, and so to restore business profits, and encourage a resumption of output at the points where idle resources exist, by restoring a workable relationshi+p between prices and costs of production

It should be iht about e rates But the more sophisticated proponents of inflation believe that this is now politically ie that all proposals under any circue rates directly in order to reduce unemploy, stated in bald ter real real wage rates (that is, wage rates in tere rates (that is, wage rates in terh an increase in prices

What they forget is that labor has itself beco unions employ labor economists who know about index numbers, and that labor is not deceived The policy, therefore, under present conditions, seems unlikely to accomplish either its economic or its political aie rates are most likely to be in need of correction, that will insist that their wage rates be raised at least in proportion to any increase in the cost-of-living index The unworkable relationshi+ps between prices and key wage rates, if the insistence of the powerful unions prevails, will ree rate structure, in fact, anized workers, whose wage rates even before the inflation were not out of line (and h union exclusionis the transition by the rise in prices whose wage rates even before the inflation were not out of line (and h union exclusionis the transition by the rise in prices

5

The more sophisticated advocates of inflation, in brief, are disingenuous They do not state their case with co even thein to talk of paper money, like the more naive inflationists, as if it were itself a for press They even solemnly discuss a ”overnically the equivalent of several dollars added to the wealth of the country

In brief, they divert both the public attention and their own fro depression For the real causes, e-cost-price structure: es and prices, between prices of raw oods, or between one price and another or one wage and another At some point these maladjustments have removed the incentive to produce, or have made it actually ianic interdependence of our exchange economy, depression spreads Not until these maladjustments are corrected can full production and employment be resumed

True, inflation erous method It makes its corrections not openly and honestly, but by the use of illusion Inflation, indeed, throws a veil of illusion over every economic process It confuses and deceives al even those who suffer by it We are all accusto our inco that even professional economists and statisticians cannot consistently break it It is not easy to see relationshi+ps always in ter us does not feel richer and prouder when he is told that our national income has doubled (in terms of dollars, of course) compared with soet 75 a week and now gets 120 thinks that he h it costs hi 75 He is of course not blind to the rise in the cost of living But neither is he as fully aware of his real position as he would have been if his cost of living had not changed and if his ive hi power that he now has, in spite of his salary increase, because of higher prices Inflation is the autosuggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for hioods and real welfare Who a us does not feel richer and prouder when he is told that our national income has doubled (in terms of dollars, of course) compared with soet 75 a week and now gets 120 thinks that he h it costs hi 75 He is of course not blind to the rise in the cost of living But neither is he as fully aware of his real position as he would have been if his cost of living had not changed and if his ive hi power that he now has, in spite of his salary increase, because of higher prices Inflation is the autosuggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for him Inflation is the opium of the people

6

And this is precisely its political function It is because inflation confuses everything that it is so consistently resorted to by our overnments We saw in chapter four, to take but one example, that the belief that public works necessarily create new jobs is false If the money was raised by taxation, , then for every dollar that the government spent on public works one less dollar was spent by the taxpayers to meet their oants, and for every public job created one private job was destroyed

But suppose the public works are not paid for from the proceeds of taxation? Suppose they are paid for by deficit financing-that is, fro or fro press? Then the result just described does not seem to take place The public works see power You cannot say that the purchasing power has been taken away froot so

But now, in accordance with our lesson, let us look at the longer consequences The borrowingup debt indefinitely; for if it tries, it will some day become bankrupt As Adam Smith observed in 1776: When national debts have once been accuree, 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 even been brought about at all, has always been brought about by a bankruptcy; soh frequently by a pretended payovernment comes to repay the debt it has accumulated for public works, it must necessarily tax more heavily than it spends In this later period, therefore, it must necessarily destroy more jobs than it creates The extra-heavy taxation then required does notpower; it also lowers or destroys incentives to production, and so reduces the total wealth and income of the country

The only escape from this conclusion is to assu always do) that the politicians in poill spend money only in ould otherwise have been depressed or ”deflationary” periods, and will promptly pay the debt off in ould otherwise have been boo fiction, but unfortunately the politicians in power have never acted that way Econo, moreover, is so precarious, and the political pressures at work are of such a nature, that govern, once embarked upon, creates powerful vested interests which demand its continuance under all conditions

If no honest attempt is made to pay off the accuht inflation instead, then the results follow that we have already described For the country as a whole cannot get anything without paying for it Inflation itself is a form of taxation It is perhaps the worst possible form, which usually bears hardest on those least able to pay On the assu evenly (which, we have seen, is never true), it would be tantae on all coh on bread and ht of as equivalent to a flat tax of the sae, without exemptions, on everyone's income It is a tax not only on every individual's expenditures, but on his savings account and life insurance It is, in fact, a flat capital levy, without exee as the rich man follow that we have already described For the country as a whole cannot get anything without paying for it Inflation itself is a form of taxation It is perhaps the worst possible form, which usually bears hardest on those least able to pay On the assu evenly (which, we have seen, is never true), it would be tantae on all coh on bread and ht of as equivalent to a flat tax of the sae, without exemptions, on everyone's income It is a tax not only on every individual's expenditures, but on his savings account and life insurance It is, in fact, a flat capital levy, without exee as the rich man

But the situation is even worse than this, because, as we have seen, inflation does not and cannot affect everyone evenly Some suffer more than others The poor are usually e terms, than the rich, for they do not have the sa themselves by speculative purchases of real equities Inflation is a kind of tax that is out of control of the tax authorities It strikes wantonly in all directions The rate of tax imposed by inflation is not a fixed one: it cannot be determined in advance We knohat it is today; we do not knohat it will be tomorrow; and tomorroe shall not knohat it will be on the day after

Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow It discourages all prudence and thrift It encourages squandering, ga, reckless waste of all kinds It often makes it more profitable to speculate than to produce It tears apart the whole fabric of stable economic relationshi+ps Its inexcusable injustices drive men toward desperate remedies It plants the seeds of fascism and communism It leads men to demand totalitarian controls It ends invariably in bitter disillusion and collapse

1Stripped down to its essentials, this is the theory of the Keynesians In The Failure of the ”New Economics” The Failure of the ”New Econoton House, 1959) I analyze this theory in detail (New Rochelle, NY: Arlington House, 1959) I analyze this theory in detail

2The reader interested in an analysis of them should consult B M Anderson, The Value of Money The Value of Money (1917; new edition, 1936); Ludwig von Mises, (1917; new edition, 1936); Ludwig von Mises, The Theory of Money and Credit The Theory of Money and Credit (American editions, 1935, 1953); or the present writer's (American editions, 1935, 1953); or the present writer's Inflation Crisis, and How to Resolve It Inflation Crisis, and How to Resolve It (New Rochelle, NY: Arlington House, 1978) (New Rochelle, NY: Arlington House, 1978)

3Cf John Stuart Mill, Principles of Political Economy Principles of Political Economy (Book 3, Chap 14, par 2); Alfred Marshall, (Book 3, Chap 14, par 2); Alfred Marshall, Principles of Economics Principles of Economics (Book VI, Chap XIII, sec 10); Benjamin M Anderson, ”A Refutation of Keynes' Attack on the Doctrine that Aggregate Supply Creates Aggregate Demand,” (Book VI, Chap XIII, sec 10); Benjamin M Anderson, ”A Refutation of Keynes' Attack on the Doctrine that Aggregate Supply Creates Aggregate De American Prosperity by a symposium of economists Cf also the symposium edited by the present author: by a symposium of economists Cf also the symposium edited by the present author: The Critics of Keynesian Economics The Critics of Keynesian Econoton House, 1960) (New Rochelle, NY: Arlington House, 1960)

Chapter XXIV

THE A assAULT ON S SAVING

FROM TIME IMMEMORIAL proverbial wisdoainst the consequences of prodigality and waste This proverbial wisdom has reflected the coments of mankind But there have always been squanderers, and there have apparently always been theorists to rationalize their squandering proverbial wisdoainst the consequences of prodigality and waste This proverbial wisdom has reflected the coments of mankind But there have always been squanderers, and there have apparently always been theorists to rationalize their squandering

The classical econo the fallacies of their own day, showed that the saving policy that was in the best interests of the individual was also in the best interests of the nation They showed that the rational saver, in , the whole community But today the ancient virtue of thrift, as well as its defense by the classical econoedly new reasons, while the opposite doctrine of spending is in fashi+on

In order to make the fundamental issue as clear as possible, we cannot do better, I think, than to start with the classic exaine two brothers, then, one a spendthrift and the other a prudent man, each of whom has inherited a suard the incoht to work for a living or give most of their income to charity, because such questions are irrelevant to our present purpose their income to charity, because such questions are irrelevant to our present purpose

Alvin, then, the first brother, is a lavish spender He spends not only by teo no further back) of Rodbertus, who declared in the middle of the nineteenth century that capitalists ”must expend their income to the last penny in cooods accumulate, and part of the workht clubs; he tips handsomely; he maintains a pretentious establishment, with plenty of servants; he has a couple of chauffeurs, and doesn't stint hi stable; he runs a yacht; he travels; he loads his wife doith diaives expensive and useless presents to his friends Alvin is always seen at the night clubs; he tips handsomely; he maintains a pretentious establishment, with plenty of servants; he has a couple of chauffeurs, and doesn't stint hi stable; he runs a yacht; he travels; he loads his wife doith diaives expensive and useless presents to his friends

To do all this he has to dig into his capital But what of it? If saving is a sin, dissavingup for the har of his pinchpenny brother Benjareat favorite with the hat check girls, the waiters, the restaurateurs, the furriers, the jewelers, the luxury establishard him as a public benefactor Certainly it is obvious to everyone that he is giving e his money around

Compared with him brother Benjamin is much less popular He is seldoht clubs, and he does not call the head waiters by their first names Whereas Alvin spends not only the full 50,000 inco into capital besides, Benjamin lives much more modestly and spends only about 25,000 Obviously, think the people who see only what hits the less than half as much employment as Alvin, and the other 25,000 is as useless as if it did not exist

But let us see what Benjamin actually does with this other 25,000 He does not let it pile up in his pocketbook, his bureau drawers, or in his safe He either deposits it in a bank or he invests it If he puts it either into a co businesses on short ter capital, or uses it to buy securities In other words, Benjamin invests his money either directly or indirectly But when oods-houses or office buildings or factories or shi+ps or trucks or machines Any one of these projects puts as ives as much employment as the same amount of money spent directly on consumption invests it If he puts it either into a co businesses on short ter capital, or uses it to buy securities In other words, Benjamin invests his money either directly or indirectly But when oods-houses or office buildings or factories or shi+ps or trucks or machines Any one of these projects puts as ives as much employment as the same a” in short, in theThe usual difference is that the money is turned over to someone else to spend one co alone, and put as much money in circulation The chief difference is that the e can be seen by anyone with one eye; but it is necessary to look a little nize that every dollar of Benjaives as much employment as every dollar that Al vin throws around

A dozen years roll by Alvin is broke He is no longer seen in the night clubs and at the fashi+onable shops; and those whom he formerly patronized, when they speak of hi letters to Benjamin And Benja, not only provides h investh his invest and reater He has, in brief, added to the nation's productive capacity; Alvin has not

2

Soin recent years that they cannot all be answered by our example of the two brothers It is necessary to devote some further space to them Many stem from confusions so elementary as to seem incredible, particularly when found in the works of economic writers of wide repute The word Many stem from confusions so elementary as to seem incredible, particularly when found in the works of econo, for exaof money, and sometimes to mean of money, and sometimes to mean investment investment, with no clear distinction, consistentlyof hand-to-hand money, if it takes place irrationally, causelessly, and on a large scale, is inis extre that looks like this, but should be carefully distinguished froot under way Consu and investot under way Consu and investment are then both both contracted Consu They do this partly, indeed, because they fear they may lose their jobs, and they wish to conserve their resources: they have contracted their buying not because they wish to consume less but because they wish to make sure that their power to consuer period if they do lose their jobs contracted Consu They do this partly, indeed, because they fear they may lose their jobs, and they wish to conserve their resources: they have contracted their buying not because they wish to consume less but because they wish to make sure that their power to consuer period if they do lose their jobs

But consuoods have probably fallen, and they fear a further fall If they defer spending, they believe they will get more for their oods that are falling in value, but in money which they expect (relatively) to rise in value

The sa They have lost their confidence in the profitability of business; or at least they believe that if they wait a few months they can buy stocks or bonds cheaper We oods thatmoney itself for a rise

It is a ” It does not spring fro And it is a still ” is the cause cause of depressions It is, on the contrary, the of depressions It is, on the contrary, the consequence consequence of depressions of depressions