All Commentary
Thursday, August 1, 1996

Is Inflation Dead?

Faulty Monetary Thought Paved the Way for Monetary Destruction

Mainstream economists are telling us that “there’s little or no danger of inflation.” The rates of inflation have come down significantly in recent years and can be expected to remain benign in the future. In the developed countries, average price inflation in 1995 was about 2.5 percent. In most less developed countries, it moderated to 8 percent. In Latin America, the Middle East, and Eastern Europe, it continued at above-average rates, some even at triple-digit rates.

When compared with the 1970s and 80s the rates of inflation in developed countries, no matter how you may define it, have indeed come down. The monetary authorities that shape national monetary policies may have learned from their earlier blunders or may have been replaced by more prudent managers. The governors of the Federal Reserve System who issue and manage the U.S. dollar and preside over the international dollar standard may have finally learned by experience that inflation has undesirable economic, social, and political consequences.

Some credit for the American learning process must be given to the governors of two other central banks: the German Bundesbank and the Bank of Japan. They consistently inflated their currencies at lesser rates and kept them harder than the U.S. dollar, which forced the Federal Reserve to follow suit. Refusal to follow could trigger an international flight from the dollar, which would have calamitous consequences the world over. The dollar crises of 1978 and 1979 were early warning signals of things to come if the Fed did not mend its easy- money ways and keep in better step with its hard-money competitors.

Despite the visible improvements in central bank behavior in recent years, it is certainly premature to say inflation is down for the count. The monetary system that bred past inflations remains unchanged; the monetary thought that guided the monetary authorities is still popular, especially with government officials. It grants legislators and regulators the monopolistic right to manage the people’s money and manipulate it to suit their political ends.

At the present, the central banks of the developed countries are aggressively expanding their credits because of the fear of recession. With unemployment running high, the Bundesbank recently cut its discount rate to a record low of 2.5 percent, hoping to revive the dragging economy. This “bastion” of anti-inflationary credibility may be changing its course to go the way of all full-employment programs. The Bank of Japan, which is an important creditor to the U.S. government, last year lowered its official discount rate to a record low—to one half of one percent. When compared with these “stalwarts” of hard money, the Federal Reserve System, which presently is charging 5 percent for its credits, looks like a miser and tightwad. Actually, it has no choice but to keep its rates high because the United States is a low-saving, high-consumption, heavily indebted country with a chronic current-account deficit.

In developing countries, inflation is still an every-day experience. In Asia the rate remains relatively high at some 12 percent. Turkey is the worst, with an inflation rate over 75 percent. In the economies of the former Soviet Union the average rate is estimated at 150 percent, with that of Belarus at 700 percent, Ukraine at 300 percent, Azerbaijan at 460 percent, and Tajikistan at 390 percent. These rates are well down from an average rate of more than 1,500 percent in 1994.

Everywhere central banks are creating new credits and printing new money. The stock of money is growing faster than at any time in the 1990s. Moreover, the United States is experiencing an explosive growth of securitized debt, what most economists call “rising money velocity.” Yet, the price inflation of goods and services remains rather moderate. The rampant growth of leveraged speculation and corporate acquisitions point at a different kind of inflation: that of existing capital assets. Instead of soaring prices of goods and services, we see the effects of easy money and credit in the financial markets. Inflation is not dead but very much alive. It has moved from Main Street to Wall Street.

Most developed countries are mired in economic stagnation or even recession. Japan continues to suffer the readjustment pains from its credit expansion binge of the 1980s. The European countries are chafing under crushing loads of welfarism and soaring rates of unemployment. The European monetary ease, led by the Bundesbank, is failing to stimulate economic production but instead is fueling a great financial-asset inflation; European stock prices are hitting one record after the other. The United States, which is the only country not mired in stagnation, is leading the way in the asset inflation.

Our age of inflation has deep roots in doctrines and theories that disparage economic freedom and deny the freedom of contract. Faulty monetary thought paved the way for the age of monetary destruction by allowing governments the world over to create monopolistic banks of issue and make their money “legal tender,” which everyone is forced to accept no matter how depreciated it may be. To refuse to accept it is to forfeit income and wealth. The monopolistic money system then was made to serve the welfare state with its unquenchable thirst for deficit spending. It was in 1971, finally, that the U.S. government opened the inflation flood gates by removing the last deterrent, the gold reserve requirement. Building on political force and managerial discretion, it created the paper dollar standard.

Depend on it, the legislators and regulators who gave us such a system will bring us more inflation in years to come.


Hans F. Sennholz

  • 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.