Free To Choose: a personal Statement

The Cure for lnflation
271
nessmen find that their costs have risen, so that the extra sales
are not as profitable as they anticipated, unless they can raise their
prices even faster. The bad effects start to emerge: higher prices,
less buoyant demand, inflation combined with stagnation. As with
the alcoholic, the temptation is to increase the quantity of money
still faster, which produces the roller coaster we have been on. In
both cases, it takes a larger and larger amount—of alcohol or
money
to give the alcoholic or the economy the same "kick."
The parallel between alcoholism and inflation carries over to
the cure. The cure for alcoholism is simple to state: stop drinking.
It is hard to take because, this time, the bad effects come first,
the good effects come later. The alcoholic who goes on the wagon
suffers severe withdrawal pains before he emerges in the happy
land of no longer having an almost irresistible desire for another
drink. So also with inflation. The initial side effects of a slower
rate of monetary growth are painful: lower economic growth,
temporarily high unemployment, without, for a time, much reduc-
tion of inflation. The benefits appear only after one or two years
or so, in the form of lower inflation, a healthier economy, the
potential for rapid noninflationary growth.
Painful side effects are one reason why it is difficult for an
alcoholic or an inflationary nation to end its addiction. But there
is another reason, which, at least in the earlier stage of the disease,
may be even more important: the lack of a real desire to end the
addiction. The drinker enjoys his liquor; he finds it hard to accept
that he really is an alcoholic; he is not sure he wants to take the
cure. The inflationary nation is in the same position. It is tempting
to believe that inflation is a temporary and mild matter produced
by unusual and extraneous circumstances, and that it will go away
of its own accord—something that never happens.
Moreover, many of us enjoy inflation. We would naturally like
to see the prices of the things we
buy
go down, or at least stop
going up. But we are more than happy to see the prices of the
things we
sell
go up—whether goods we produce, our labor
services, or houses or other items we own. Farmers complain
about inflation but congregate in Washington to lobby for higher
prices for their products. Most of the rest of us do the same in one
way or another.
One reason inflation is so destructive is because some people

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FREE TO CHOOSE: A Personal Statement
benefit greatly while other people suffer; society is divided into
winners and losers. The winners regard the good things that
happen to them as the natural result of their own foresight,
prudence, and initiative. They regard the bad things, the rise in
the prices of the things they buy, as produced by forces outside
their control. Almost everyone will say that he is against inflation;
what he generally means is that he is against the bad things that
have happened to him.
To take a specific example, almost every person who has owned
a home during the past two decades has benefited from inflation.
The value of his home has risen sharply. If he had a mortgage,
the interest rate was generally below the rate of inflation. As a
result the payments called "interest," as well as those called "prin-
cipal," have in effect been paying off the mortgage. To take a
simple example, suppose both the interest rate and inflation rate
were 7 percent in one year. If you had a $10,000 mortgage on
which you paid only interest, a year later the mortgage would
correspond to the same buying power as $9,300 would have a year
earlier. In real terms you would owe $700 less—just the amount
you paid as interest. In real terms you would have paid nothing
for the use of the $10,000. (Indeed, because the interest is de-
ductible in computing your income tax, you would actually bene-
fit. You would have been paid for borrowing.) The way this effect
becomes apparent to the homeowner is that his equity in the house
goes up rapidly. The counterpart is a loss to the small savers who
provided the funds that enabled savings and loan associations,
mutual savings banks, and other institutions to finance mortgage
loans. The small savers had no good alternative because govern-
ment limits narrowly the maximum interest rate that such institu-
tions can pay to their depositors—supposedly to protect the
depositors.
Just as high government spending is one reason for excessive
monetary growth, so lower government spending is one element
that can contribute to reducing monetary growth. Here, too, we
tend to be schizophrenic. We would all like to see government
spending go down, provided it is not spending that benefits us.
We would all like to see deficits reduced, provided it is through
taxes imposed on others.

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