Economics in One Lesson

Economics in One Lesson
materials and prices of finished goods, or between one price and
another, or one wage and another. At some point these maladjust-
ments have removed the incentive to produce, or have made it actu-
ally impossible for production to continue; and through the organic
interdependence of our exchange economy, depression spreads. Not
until these maladjustments are corrected can full production and
employment be resumed.
True, inflation may sometimes correct them; but it is a heady and
dangerous method. It makes its corrections not openly and honestly,
but by the use of illusion. It is like getting people up an hour earlier
only by making them believe that it is eight o’clock when it is really
seven. It is perhaps no mere coincidence that a world which has to
resort to the deception of turning all its clocks ahead an hour in order
to accomplish this result should be a world that has to resort to infla-
tion to accomplish an analogous result in the economic sphere.
For inflation throws a veil of illusion over every economic process.
It confuses and deceives almost everyone, including even those who
suffer by it. We are all accustomed to measuring our income and
wealth in terms of money. The mental habit is so strong that even
professional economists and statisticians cannot consistently break it.
It is not easy to see relationships always in terms of real goods and
real welfare. Who among 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 some pre-inflationary period? Even the clerk
who used to get $25 a week and now gets $35 thinks that he must be
in some way better off, though it costs him twice as much to live as it
did when he was getting $25. 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
money salary had been 
reduced
to give him the same reduced purchasing
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.
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The Mirage of Inflation
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6
And this is precisely its political function. It is because inflation
confuses everything that it is so consistently resorted to by our mod-
ern “planned economy” governments. We saw in chapter 14, to take
but one example, that the belief that public works necessarily create
new jobs is false. If the money was raised by taxation, we saw, then for
every dollar that the government spent on public works one less dol-
lar was spent by the taxpayers to meet their own wants, 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, from
the proceeds of government borrowing or from resorting to the print-
ing press? Then the result just described does not seem to take place.
The public works seem to be created out of “new” purchasing power.
You cannot say that the purchasing power has been taken away from the
taxpayers. For the moment the nation seems to have got something for
nothing.
But now, in accordance with our lesson, let us look at the longer
consequences. The borrowing must someday be repaid. The govern-
ment cannot keep piling up debt indefinitely; for if it tries, it will
someday become bankrupt. As Adam Smith observed in 1776:
When national debts have once been accumulated to a
certain degree, there is scarce, I believe, a single instance
of their having been fairly and completely paid. The lib-
eration of the public revenue, if it has ever been brought
about at all, has always been brought about by a bank-
ruptcy; sometimes by an avowed one, but always by a real
one, though frequently by a pretended payment.
Yet when the government comes to repay the debt it has accumu-
lated 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 not
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merely take away purchasing power; it also lowers or destroys incen-
tives to production, and so reduces the total wealth and income of the
country.
The only escape from this conclusion is to assume (as of course
the apostles of spending always do) that the politicians in power will
spend money only in what would otherwise have been depressed or
“deflationary” periods, and will promptly pay the debt off in what
would otherwise have been boom or “inflationary” periods. This is a
beguiling fiction, but unfortunately the politicians in power have never
acted that way. Economic forecasting, moreover, is so precarious, and
the political pressures at work are of such a nature, that governments
are unlikely ever to act that way. Deficit spending, once embarked
upon, creates powerful vested interests which demand its continuance
under all conditions.
If no honest attempt is made to pay off the accumulated debt, and
outright inflation is resorted to instead, then the results follow that we
have already described. For the country as a whole cannot get any-
thing 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 assumption that inflation affected everyone
and everything evenly (which, we have seen, is never true), it would be
tantamount to a flat sales tax of the same percentage on all commodi-
ties, with the rate as high on bread and milk as on diamonds and furs.
Or it might be thought of as equivalent to a flat tax of the same per-
centage, 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 exemptions,
in which the poor man pays as high a percentage 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 may be more heavily taxed by inflation, in per-
centage terms, than the rich. For 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 deter-
mined in advance. We know what it is today; we do not know what it
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will be tomorrow; and tomorrow we shall not know what 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 pru-
dence and thrift. It encourages squandering, gambling, reckless waste
of all kinds. It often makes it more profitable to speculate than to pro-
duce. It tears apart the whole fabric of stable economic relationships.
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 col-
lapse.
The Mirage of Inflation
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