Why “Inflation” Is Back

Ideas and Consequences Why “Inflation” Is Back BY LAWRENCE W. REED “ overnment,”observed the renowned Austrian Before paper money, governments inflated by economist Ludwig von Mises, “is the only diminishing the precious-metal content of their Ginstitution that can take a valuable commod- coinage. The ancient prophet Isaiah reprimanded the ity like paper, and make it worthless by applying ink.” Israelites with these words: “Thy silver has become Mises was describing the curse of inflation, the dross, thy wine mixed with water.” Roman emperors process whereby government expands a nation’s money repeatedly melted down the silver denarius and added supply and thereby erodes the value of each mone- junk metals until the denarius was less than 1 percent tary unit—dollar, peso, pound, franc, or whatever. It silver.The Saracens of Spain clipped the edges of their shows up in the form of rising prices, which most peo- coins so they could mint more until the coins became ple confuse with the inflation itself. The distinction is too small to circulate. Prices rose as a mirror image of important because, as economist Percy Greaves once the currency’s worth. explained so eloquently, “Changing the definition Rising prices are not the only consequence of mon- changes the responsibility.” etary expansion. Inflation also erodes savings and Define inflation as rising encourages debt. It under- prices and, like Jimmy Carter, mines confidence and deters you’ll think that oil sheiks, investment. It destabilizes the credit cards, and private busi- economy by fostering booms nesses are the culprits, and and busts. If it’s bad enough, it price controls are the answer. can even wipe out the very Define inflation in the classic government responsible for it fashion as an increase in the in the first place. It can lead to supply of money, with rising even worse afflictions. Hitler prices as a consequence, and you and Napoleon both rose to then have to ask the revealing power in part because of the question, “Who increases the chaos of runaway inflations. money supply?” Only one All this raises many issues entity can do that legally; all others are called “counter- economists have long debated and about which I have feiters” and go to jail. my own views. Who or what should determine a Most economists worth their salt have long argued nation’s supply of money? Why do governments so reg- that inflation is always and everywhere a monetary ularly mismanage it? What is the connection between matter. As one of them put it, rising prices no more fiscal and monetary policy? Suffice it to say here that cause inflation than wet streets cause rain. The mone- governments inflate because their appetite for revenue tary authorities inflate and then prices rise, in that exceeds their willingness to tax or their ability to bor- order, and if the people’s confidence in that money row. British economist John Maynard Keynes was an dissipates, the price hikes will be astronomical. Now influential charlatan in many ways, but he nailed it that prices in the United States are going up at their when he wrote, “By a continuing process of inflation, fastest pace in more than 25 years, a little history lesson is in order. Lawrence Reed ([email protected]) is the president of FEE. THE FREEMAN: Ideas on Liberty 4 Why “Inflation” Is Back governments can confiscate, secretly and unobserved, On the day I arrived, the Bolivian peso traded at an important part of the wealth of their citizens.” 150,000 to the dollar. Just days later, it had sunk to 200,000. I brought nine million pesos home with me— Inflation in Africa and South America a million pesos (in 1,000-peso notes) in each of nine aper money is falling in value all over the world wads bound together with string by a local bank. I kept Pthese days, but no place is more ravaged by inflation one million, which I have to this day,and sold the other than Zimbabwe, in southern Africa.There, the govern- eight to gold bugs and currency collectors for $500 ment’s confiscation of wealth is no longer secret and each. Not bad, considering that, at 200,000 to the buck, unobserved. Prices are rocketing upwards at an annual I paid just $5 for each million-peso wad ($45 for the rate exceeding 11 million percent. After printing tril- whole nine million).That little bit of international arbi- lions of Zimbabwean dollars to finance its socialist trage financed my trip, incidentally. schemes, the dictatorship of kleptomaniac Robert Bolivian hyperinflation ended just four months Mugabe lopped three zeroes off all currency notes a later, in August 1985, after the socialist government that week before last Christmas. The $200,000 bill, for engineered it was ousted. It had printed pesos until instance, became a new $200 bill, worth about a dime they were worth less than the ink and paper. in American money. So, you say, inflation is nasty business but it’s just the South America is home to many really rotten few that do it. Not so. serial inflationists—corrupt, crackpot The late Frederick Leith-Ross, a regimes that destroy one paper “Inflation is like sin; famous authority on international money after another. Prices in every government finance, observed: “Inflation is like Argentina and Venezuela are cur- sin; every government denounces it rently climbing by about 20 percent denounces it and and every government practices it.” annually, and all indications are that every government Even Americans have witnessed the rates will accelerate in coming hyperinflations that destroyed two months. As Mugabe did in Decem- practices it.” currencies—the ill-fated continental ber, Hugo Chávez started 2008 in dollar of the Revolutionary War and Venezuela by scratching three zeroes off the paper the doomed Confederate money of the Civil War. bolivar. In Bolivia, prices are going up by nearly 15 Today’s slow-motion dollar depreciation, with prices percent, but if the country’s recent past is prologue, rising at persistent but mere single-digit rates, is just a the Bolivian regime may be on its way to ruining the limited version of the same process. Government nation’s third currency since the 1950s. spends, runs deficits, and pays some of its bills through In April 1985 I visited Bolivia to observe the world’s the inflation tax. How long it can go on is a matter of then-highest rate of price hikes, an astonishing 50,000 speculation, but trillions in national debt and politicians percent. After stiffing its foreign creditors in the early who make misers of drunken sailors and get elected 1980s, the government in La Paz could only finance its by promising even more are not factors that should bad habits through taxing its own people and printing encourage us. paper money. It did lots of both. By 1985, however, Inflation is very much with us but it must end only 10 percent of its spending was covered by taxes; someday. A currency’s value is not bottomless. Its ero- the rest was taken care of by the printing press. Paper sion must cease either because government stops its money became the country’s third largest import. Its reckless printing or prints until it wrecks the money. own presses couldn’t keep up with the government’s But surely, which way it concludes will depend in large demands, so planeloads of the stuff were flown in every measure on whether its victims come to understand week from Europe. what it is and where it comes from. 5 NOVEMBER 2008.

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