Why Inflation Is Immoral

The cavalier attitude towards inflation displayed by governments, central banks, and the economics establishment is difficult to understand. The pernicious social effects of inflation have been known for sometime. Yet, when a so called “crisis” strikes, all of the painful lessons of the past are forgotten and suddenly, inflation is the universal cure for our economic ills.

One reason for this attitude is what I call “The Tyrany of Aggregation” (TTA). The two main camps of mainstream economics, Keynesians and Monetarists, are both guilty of TTA. These two schools of thought tend to think in terms of aggregate income, spending, saving, investment, etc., seemingly heedless that these economic attributes are heterogeneous and complex and thus cannot be treated or even approximated as homogenous aggregates. Such shallow thinking naturally leads to many economic errors associated with inflation. Thus, the Keynesians and Monetarists would argue that a sudden doubling of everyone’s monetary stock would lead to a doubling of nominal prices, while real prices would remain relatively unchanged as the amount of goods and services available would be unchanged. In The Mystery of Banking, Murray Rothbard explains: “… let us picture to ourselves what I call the “Angel Gabriel” model.4 The Angel Gabriel is a benevolent spirit who wishes only the best for mankind, but unfortunately knows nothing about economics. He hears mankind constantly complaining about a lack of money, so he decides to intervene and do something about it. And so overnight, while all of us are sleeping, the Angel Gabriel descends and magically doubles everyone’s stock of money. In the morning, when we all wake up, we find that the amount of money we had in our wallets, purses, safes, and bank accounts has doubled. What will be the reaction? Everyone knows it will be instant hoopla and joyous bewilderment. Every person will consider that he is now twice as well off, since his money stock has doubled. In terms of our Figure 3.4, everyone’s cash balance, and therefore total M, has doubled to $200 billion. Everyone rushes out to spend their new surplus cash balances. But, as they rush to spend the money, all that happens is that demand curves for all goods and services rise. Society is no better off than before, since real resources, labor, capital, goods, natural resources, productivity, have not changed at all. And so prices will, overall, approximately double, and people will find that they are not really any better off than they were before. Their cash balances have doubled, but so have prices, and so their purchasing power remains the same. Because he knew no economics, the Angel Gabriel’s gift to mankind has turned to ashes.”

In the real world, inflation does not work in this manner. Rather than everyone receiving the newly created money simultaneously, money created ex nihilo enters the economy at specific points and thus people receive it at different times. Those who receive the new money first benefit as nominal prices will not have adjusted upward. Those who receive the new money last are the losers as nominal prices have already risen and thus their standard of living has declined.

Rothbard uses the effects of counterfeiting to illustrate the essential unfairness of inflation. First noting that a group of counterfeiters will inject their phoney money into the economy at specific places and times, Rothbard continues:

“Counterfeiting is of course fraud. When the counterfeiter mints brass coins and passes them off as gold, he cheats the seller of whatever goods he purchases with the brass. And every subsequent buyer and holder of the brass is cheated in turn. But it will be instructive to examine the precise process of the fraud, and see how not only the purchasers of the brass but everyone else is defrauded and loses by the counterfeit.

Let us assume that the counterfeiting process is so good that it goes undetected, and the cheaper coins pass easily as gold. What happens? The money supply in terms of dollars has gone up, and therefore the price level will rise. The value of each existing dollar has been diluted by the new dollars, thereby diminishing the purchasing power of each old dollar. So we see right away that the inflation process—which is what counterfeiting is—
injures all the legitimate, existing dollar-holders by having their purchasing power diluted. In short, counterfeiting defrauds and injures not only the specific holders of the new coins but all holders of old dollars—meaning, everyone else in society.

But this is not all: for the fall in PPM does not take place overall and all at once, as it tends to do in the Angel Gabriel model. The money supply is not benevolently but foolishly showered on all alike. On the contrary, the new money is injected at a specific point in the economy and then ripples through the economy in a step-by-step process.

Thus, in contrast to the Angel Gabriel, there is no single overall expansion of money, and hence no uniform monetary and price inflation. Instead, as we saw in the case of the early spenders, those who get the money early in this ripple process benefit at the expense of those who get it late or not at all. The first producers or holders of the new money will find their stock increasing before very many of their buying prices have risen. But, as we go down the list, and more and more prices rise, the people who get the money at the end of the process find that they lose from the inflation. Their buying prices have all risen before their own incomes have had a chance to benefit from the new money. And some people will never get the new money at all: either because the ripple stopped, or because they have fixed incomes—from salaries or bond yields, or as pensioners or holders of annuities. Counterfeiting, and the resulting inflation, is therefore a process by which some people—the early holders of the new money—benefit at the expense of (i.e., they expropriate) the late receivers. The first, earliest and largest net gainers are, of course, the counterfeiters themselves.

Thus, we see that when new money comes into the economy as counterfeiting, it is a method of fraudulent gain at the expense of the rest of society and especially of relatively fixed income groups. Inflation is a process of subtle expropriation, where the victims understand that prices have gone up but not why this has happened.”

Of all of the pernicious effects of inflation, the expropriation of the purchasing power of pensioners is the most outrageous. Someone defers instant gratification sufficiently over a number of years in order to save enough money for a comfortable retirement and then they are systematically and constantly robbed of the real value of their savings. How is this just? Why do we permit this to occur? Why does the mainstream economics profession fail to see any wrong with this?

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