All Commentary
Thursday, June 1, 1995

Inflation Is Theft

One Cannot Separate Inflationary Monetary Policy from Profligate Fiscal Policy

This collection brings together a number of different papers previously published in The Freeman over the last 25 years or so, with a new introduction by Hans Sennholz. Overall this is a strong collection of essays, particularly suitable for students or the economically inclined general reader. What is most remarkable about the essays is both how many common themes they touch upon and how the controversial issues they discuss continue to be at the heart of debates among classical liberal monetary theorists today.

A clear message of the book is that one cannot separate inflationary monetary policies from profligate fiscal policy, As with counterfeiting, the lure of inflation is that the inflator can acquire real resources at virtually zero cost. It does this not only directly, but also by reducing the value of the government’s massive debt. For political actors seeking votes, or governments seeking power, inflation is a far more palatable way than taxation to pay for new programs or military adventures. A running theme in several essays is that inflation’s effects are far more subtle than, but just as injurious as taxation’s.

Another clear theme that emerges from this volume is the need to reform not just monetary institutions but fiscal ones as well to combat inflation. Any policies that limit government expenditures and/or government debt will reduce the temptation to inflate.

Throughout the book one comes across critiques of popular definitions of inflation. Clarence Carson’s essay “Built-In Pressures to Inflation” begins by nicely clarifying these issues. Many people define inflation as “an increase in the general level of prices.” This view errs in treating one of inflation’s likely effects as its defining characteristic, and thus ignores other factors that might cause the level of prices to rise (or fall) that are not rightly seen as inflation. As numerous contributors (especially Robert Higgs and Bettina Bien Greaves) point out, inflation is, as Milton Friedman phrased it, “always and everywhere a monetary phenomenon.” Any definition of inflation must make reference to the money supply.

Several authors also point out that increases in the money supply need not always lead to increases in the price level. For example, an increase in productivity or in the demand for money, exerts downward pressure on prices.

The definition of inflation remains controversial among free market economists. The late Murray Rothbard long defined inflation as any increase in the monetary commodity, apparently irrespective of any change in demand. Others, such as George Selgin most recently, have defined inflation as an excess supply of money, allowing for increases in the quantity of money that are necessary to keep pace with demand. Mises, incidentally, held to the latter view in The Theory of Money and Credit as is made clear in the second endnote to J. H. Peters’ essay that begins the book. The ambiguities that prompted this ongoing debate are clearly evident in the various Freeman articles collected here.

Another important insight consistently present in this book is that the true costs of inflation are much more than any obvious rise in the price level. Several authors emphasize how an excess supply of money affects some sectors of the economy before others, and in so doing causes not only economically unjustified redistributions of wealth, but also changes in the relative prices of various consumer and producer goods. These changes in relative prices alter the structure of production as capital and labor are shuffled into new combinations in different lines of production. These shifts are ultimately unjustified because, as the inflation ebbs, the new demand for those goods will fall off, leaving the owners of retooled capital and retrained labor stuck with the now less useful assets. This waste is the major cost of inflation.

More generally, the havoc that inflation plays with the signaling function of prices leads to increased entrepreneurial error, increased uncertainty about the future, and the temptation to use the political process as a means of increasing one’s wealth. Any reader of this book will come away with a real appreciation for these costs and the corresponding dangers of inflation.

Only a few of the authors offer any specific recommendations for policy changes that would reduce inflation. What virtually all seem to agree on is that we must somehow end the government’s discretionary power over the production of money. For some this means a return to the gold standard, for others it means ending fractional reserve banking, for still others it seems to mean opening up the production of money (including paper) to private entrepreneurs/ banks. All of these options sounded truly utopian when written in the ’60s and ’70s. However, with the exception of ending fractional reserve banking, these proposals are now seen as legitimate options among a growing number of professional economists. That these free market ideas are now taken seriously is the ultimate intellectual vindication for the authors represented in this collection.

One other interesting aspect of this book is how accurate many of the authors were with respect to the direction the U.S. economy would take in the ’70s and ’80s. Although no one foresaw the growth of the ’80s, nor the apparent resurgence of free market thought at the policy level in the ’90s, several authors saw the inflation of the ’70s and the problems that would arise from trying to eliminate it in the early ’80s. Ignored at the time, these arguments take on a fresh relevance when viewed with hindsight.

Inflation is Theft is a nice place to start to get a handle on the basics of why inflation occurs and what problems it causes. As budget deficits persist, as politicians of all stripes continue to try to please voters by promising them the moon, and as the current administration appears to want to make the U.S. the world’s policeman, the temptation to resort to inflationary finance is ever-present. To avoid falling for its siren-like charm, we need to understand the nature of the beast.

  • Hans F. Sennholz (1922-2007) was Ludwig von Mises' first PhD student in the United States. He taught economics at Grove City College, 1956–1992, having been hired as department chair upon arrival. After he retired, he became president of the Foundation for Economic Education, 1992–1997. 

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.