Economics in One Lesson

Economics in One Lesson
they will be obliged to get along on a lower standard of living than
before.
We may clarify the process further by a hypothetical set of figures.
Suppose we divide the community arbitrarily into four main groups of
producers, A, B, C, and D, who get the money-income benefit of the
inflation in that order. Then when money incomes of group A have
already increased 30 percent, the prices of the things they purchase
have not yet increased at all. By the time money incomes of group B
have increased 20 percent, prices have still increased an average of
only 10 percent. When money incomes of group C have increased
only 10 percent, however, prices have already gone up 15 percent.
And when money incomes of group D have not yet increased at all,
the average prices they have to pay for the things they buy have gone
up 20 percent. In other words, the gains of the first groups of pro-
ducers to benefit by higher prices or wages from the inflation are nec-
essarily at the expense of the losses suffered (as consumers) by the last
groups of producers that are able to raise their prices or wages.
It may be that, if the inflation is brought to a halt after a few years,
the final result will be, say, an average increase of 25 percent in money
incomes, and an average increase in prices of an equal amount, both of
which are fairly distributed among all groups. But this will not cancel
out the gains and losses of the transition period. Group D, for exam-
ple, even though its own incomes and prices have at last advanced 25
percent, will be able to buy only as much goods and services as before
the inflation started. It will never compensate for its losses during the
period when its income and prices had not risen at all, though it had to
pay 30 percent more for the goods and services it bought from the
other producing groups in the community, A, B, and C.
3
So inflation turns out to be merely one more example of our cen-
tral lesson. It may indeed bring benefits for a short time to favored
groups, but only at the expense of others. And in the long run it
brings disastrous consequences to the whole community. Even a rela-
tively mild inflation distorts the structure of production. It leads to
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The Mirage of Inflation
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the overexpansion of some industries at the expense of others. This
involves a misapplication and waste of capital. When the inflation col-
lapses, or is brought to a halt, the misdirected capital investment—
whether in the form of machines, factories, or office buildings—can-
not yield an adequate return and loses the greater part of its value.
Nor is it possible to bring inflation to a smooth and gentle stop,
and so avert a subsequent depression. It is not even possible to halt
an inflation, once embarked upon, at some preconceived point, or
when prices have achieved a previously-agreed-upon level; for both
political and economic forces will have got out of hand. You cannot
make an argument for a 25 percent advance in prices by inflation with-
out someone’s contending that the argument is twice as good for an
advance of 50 percent, and someone else’s adding that it is four times
as good for an advance of 100 percent. The political pressure groups
that have benefited from the inflation will insist upon its continuance.
It is impossible, moreover, to control the value of money under
inflation. For, as we have seen, the causation is never a merely mechan-
ical one. You cannot, for example, say in advance that a 100 percent
increase in the quantity of money will mean a 50 percent fall in the value
of the monetary unit. The value of money, as we have seen, depends
upon the subjective valuations of the people who hold it. And those
valuations do not depend solely on the quantity of it that each person
holds. They depend also on the 
quality
of the money. In wartime the
value of a nation’s monetary unit, not on the gold standard, will rise on
the foreign exchanges with victory and fall with defeat, regardless of
changes in its quantity. The present valuation will often depend upon
what people expect the 
future
quantity of money to be. And, as with
commodities on the speculative exchanges, each person’s valuation of
money is affected not only by what