What You Should Know About Inflation
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What precisely is inflation? What is its cause? Its cure? How long will it last? Is there any way you can take advantage of inflation? If not, how can you protect yourself against further erosion in the value of your savings?
Henry Hazlitt gives his answers to these questions and many more in this clear, readable book. He exposes the fallacies by which some people have come to justify inflation, and he discusses the role of governments in creating the very inflation that they claim to be combatting. For this paper-bound edition Mr. Hazlitt has added new statistics and information, and in a new preface he comments on the current economic situation.
What You Should Know About Inflation is required reading for anyone who wants to know why his money is worth less and what he can do about it.
“A keen economic mind...provides an incisive primer on the subject.”—THE WALL STREET JOURNAL
“This concise little book explains the elements of the subject in simplest terms, and takes the mystery out of the technical jargon in which it is too often buried. Henry Hazlitt answers...questions with logic and lucidity.”—INVESTMENT DEALER’S DIGEST
Henry S. Hazlitt
Henry Stuart Hazlitt (November 28, 1894 - July 9, 1993) was an American journalist who wrote articles on business and economics for such publications as The Wall Street Journal, The Nation, The American Mercury, Newsweek, and The New York Times. He is widely cited in both libertarian and conservative circles. His books include Economics in One Lesson, Will Dollars Save the World?, The Failure of the New Economics, and The Foundations of Morality.
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What You Should Know About Inflation - Henry S. Hazlitt
This edition is published by PICKLE PARTNERS PUBLISHING—www.pp-publishing.com
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Text originally published in 1968 under the same title.
© Pickle Partners Publishing 2016, all rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted by any means, electrical, mechanical or otherwise without the written permission of the copyright holder.
Publisher’s Note
Although in most cases we have retained the Author’s original spelling and grammar to authentically reproduce the work of the Author and the original intent of such material, some additional notes and clarifications have been added for the modern reader’s benefit.
We have also made every effort to include all maps and illustrations of the original edition the limitations of formatting do not allow of including larger maps, we will upload as many of these maps as possible.
WHAT YOU SHOULD KNOW ABOUT INFLATION
BY
HENRY HAZLITT
Second Edition
TABLE OF CONTENTS
Contents
TABLE OF CONTENTS 3
PREFACE 5
1—What Inflation Is 6
2—Some Qualifications 8
3—Some Popular Fallacies 10
4—A Twenty-Year Record 11
5—False Remedy: Price Fixing 12
6—The Cure for Inflation 14
7—Inflation Has Two Faces 16
8—What Monetary Management
Means 18
9—Gold Goes With Freedom 20
10—In Dispraise of Paper 22
11—Inflation and High Costs
24
12—Is Inflation a Blessing? 26
13—Why Return to Gold? 28
14—Gold Means Good Faith 30
15—What Price for Gold? 32
16—The Dollar-Gold, Ratio 34
17—Lesson of the Greenbacks 36
18—The Black Market Test 38
19—How to Return to Gold 40
20—Some Errors of Inflationists 42
21—Selective
Credit Control 45
22—Must We Ration Credit? 47
23—Money and Goods 49
24—The Great Swindle 51
25—Easy Money = Inflation 53
26—Cost-Push Inflation? 55
27—Contradictory Goals 57
28—Administered,
Inflation 59
29—Easy Money Has An End 61
30—Can Inflation Merely Creep? 62
31—How to Wipe Out Debt 64
32—The Cost-Price Squeeze 66
33—The Employment Act of 1946 68
34—Inflate? Or Adjust? 69
35—Deficits vs. Jobs 71
36—Why Cheap Money Fails 73
37—How to Control Credit 75
38—Who Makes Inflation? 77
39—Inflation As a Policy 79
40—The Open Conspiracy 81
41—How the Spiral Spins 83
42—Inflation vs. Morality 85
43—How Can You Beat Inflation? 87
44—The ABC of Inflation 90
REQUEST FROM THE PUBLISHER 98
PREFACE
This book first appeared in 1960; a revised edition was published in 1965. For the present edition the main statistical comparisons and tables have been brought up to date. Where older figures and comparisons illustrate a principle or consequence fully as well as more recent figures would, however, they have been allowed to stand.
No book on inflation, in fact, can ever be completely up to date. New statistics on wholesale prices and consumer prices appear every month. New figures on the country’s stock of money appear each week. On the organized commodity markets, prices are changing every day and every hour. And as long as inflation continues most of the changes are upward.
If I were to try to tell here what has happened since either the 1965 or the 1960 edition, I could do it in as little as three words: inflation has continued. Between the end of 1964 and the end of 1967 the nation’s stock of paper money (currency plus demand bank deposits) was increased by $22 billion, or 12 per cent. Between the end of 1959 and the end of 1967 the nation’s stock of paper money was increased by $40 billion, or 22 per cent. From the end of 1964 till the month of writing this the average of wholesale prices has increased 7 per cent. In the same period the cost of living has gone up 10 per cent. Since the end of 1959, it has gone up 17 per cent.
If we carry these comparisons still further back, we find that since 1939 the cost of living has gone up 145 per cent, which means that the dollar today will buy only as much as 41 cents bought then.
In other words, the inflation of the last thirty years has already wiped out about 60 per cent of the purchasing power of peoples’ savings deposits, mortgages, bonds (including government bonds), life-insurance benefits, and fixed pensions. It has impoverished the poor and the elderly, and all those who are not financially sophisticated enough, or whose resources are not great enough, to know how to or even to be able to buy common stocks, or real estate, or paintings by famous artists, in order to protect themselves to some extent against the dwindling value of their dollars. Worse, in all those who are retired or too old or disabled to work, the prospect of a still further inflation has created a haunting fear of a further but unknown erosion in the buying power of their pensions or savings.
One grim irony is that the War on Poverty,
with its massive public spending and chronic deficits, has meant in-creased poverty for millions.
It is in any case impossible (as explained in Chapter 43) for everybody to protect himself against inflation. A minority can do so only at the expense of the rest of us. The only cure for the evils of inflation is to halt the inflation itself. Any government can do this if it has the will.
HENRY HAZLITT
May, 1968
1—What Inflation Is
No subject is so much discussed today—or so little understood—as inflation. The politicians in Washington talk of it as if it were some horrible visitation from without, over which they had no control—like a flood, a foreign invasion, or a plague. It is something they are always promising to fight
—if Congress or the people will only give them the weapons
or a strong law
to do the job.
Yet the plain truth is that our political leaders have brought on inflation by their own money and fiscal policies. They are promising to fight with their right hand the conditions brought on with their left.
Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit. If you turn to the American College Dictionary, for example, you will find the first definition of inflation given as follows r "Undue expansion or increase of the currency of a country, esp. by the issuing of paper money not redeemable in specie."
In recent years, however, the term has come to be used in a radically different sense. This is recognized in the second definition given by the American College Dictionary: "A substantial rise of prices caused by an undue expansion in paper money or bank credit." Now obviously a rise of prices caused by an expansion of the money supply is not the same thing as the expansion of the money supply itself. A cause or condition is clearly not identical with one of its consequences. The use of the word inflation
with these two quite different meanings leads to endless confusion.
The word inflation
originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean a rise in prices
is to deflect attention away from the real cause of inflation and the real cure for it.
Let us see what happens under inflation, and why it happens. When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase—or does not increase as much as the supply of money—then the prices of goods will go up. Each individual dollar becomes less valuable because there are more dollars. Therefore more of them will be offered against, say, a pair of shoes or a hundred bushels of wheat than before. A price
is an exchange ratio between a dollar and a unit of goods. When people have more dollars, they value each dollar less. Goods then rise in price, not because goods are scarcer than before, but because dollars are more abundant.
In the old days, governments inflated by clipping and debasing the coinage. Then they found they could inflate cheaper and faster simply by grinding out paper money on a printing press. This is what happened with the French assignats in 1789, and with our own currency during the Revolutionary War. Today the method is a little more in-direct. Our government sells its bonds or other IOU’s to the banks. In payment, the banks create deposits
on their books against which the government can draw. A bank in turn may sell its government IOU’s to the Federal Reserve Bank, which pays for them either by creating a deposit credit or having more Federal Reserve notes printed and paying them out. This is how money is manufactured.
The greater part of the money supply
of this country is represented not by hand-to-hand currency but by bank deposits which are drawn against by checks. Hence when most economists measure our money supply they add demand deposits (and now frequently, also, time deposits) to currency outside of banks to get the total. The total of money and credit, including commercial time deposits, was $51 billion at the end of 1939 and $365 billion at the end of 1967. This increase of 612 per cent in the supply of money was overwhelmingly the reason why wholesale prices rose 153 per cent in the same period.
2—Some Qualifications
It is often argued that to attribute inflation solely to an increase in the volume of money is oversimplification.
This is true. Many qualifications have to be kept in mind.
For example, the money supply
must be thought of as including not only the supply of hand-to-hand currency, but the supply of bank credit—especially in the United States, where most payments are made by check.
It is also an oversimplification to say that the value of an individual dollar