Inflation Henry Hazlitt, The Inflation Crisis and How to Resolve It - Intercollegiate Studies Institute

Inflation Henry Hazlitt, The Inflation Crisis and How to Resolve It

 

The Inflation Crisis and How to Resolve It
By Henry Hazlitt,
(New Rochelle, N.Y.: Arlington House, 1978)

HENRY HAZLITT DEFINES inflation as the increase in the general price level, the immediate cause of which is excessive growth in the money supply. Among its harmful effects, inflation reduces the value of past savings, wantonly redistributes wealth and income, encourages gambling and speculation at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, corniest public and private morals, and can provoke revolution between social classes.

Some of these charges require explanation which Mr. Hazlitt freely gives. For example, in the acute phase of the German hyperinflation (1921-1923), resources were misdirected into tangible luxuries such as furs, perfumes, jewelry, expensive hotels, night-clubs, and other durable property and articles which had a high appreciation rate and away from perishable essentials. Machines were produced rather than food, clothes, shoes, and milk. Production became a gamble of speculation in currency and goods instead of a job of minimizing costs and improving the product. Everybody speculated from the elevator boy to the typist. The gambling was not confined to stock and commodity markets but was everywhere at all prices. Eventually businessmen became demoralized, sales stopped, farmers refused to sell their products, factories closed, trade stopped, and people starved.

Inflation rewards gambling and speculation instead of effort. For some, gambling becomes too risky and corruption and crime a surer path for quick reward. While few recognize what’s happening, many blame their plight not on the government, but on their neighbors who appear to be profiting from the inflation. They feel that the economic system is unjust so people are tempted to steal back what has been taken from them. In this way inflation breeds dishonesty because it is a dishonest government act and sets a bad example for its citizens.

Hazlitt correctly assigns the blame for inflation solely with the Federal Reserve’s discretionary monetary policy, which permits it to expand the money supply indiscriminately. The pressure to do this comes from two sources: first, the need to finance federal deficits; second, relief from unemployment pressures resulting from the union-led wages increases.

According to Hazlitt, the classical 100% reserve gold standard with its automatic check on excessive internal credit expansion is the only system that offers protection from 1 the discretionary policy that leads to inflation. He does not believe that it is politically feasible to advocate a direct shift back to the gold standard. Instead, he advocates private money as an intermediate step. To permit this the government and courts need to permit and enforce voluntary private contracts providing for payment in terms of gold value or any other currency. The official government currency would then have to compete with other currencies. Hazlitt believes that most citizens would use their own government’s money but that the actual or potential competition of foreign or private money will bring the needed reform and perhaps even a return to the gold standard.

Hazlitt’s analysis of the causes of inflation and description of its harmful effects present nothing novel but certainly  bear  repeating. His reform proposal, which is based on Hayek’s recent work on competition among currencies, is novel but not without historical precedent. Whether or not it is capable of bringing about the needed reform may be ​​disenchanted with the currency) it becomes highly negative and its absolute value can reach astronomical heights. For instance as k falls from .01 to .0001 in a week this represents an almost 100% decline in k in a week or a 5200% per year fall in k. Assuming y does not decline, prices would have to rise by this amount on an annual basis even if the money stock did not increase.

Hazlitt’s analysis of the monetarist position is also marred by failures to distinguish between real and nominal cash balances, individual and aggregate behavior, attempted behavior and realized results (ex ante and ex post magnitudes), and money and credit. For this reason it cannot be recommended to an advanced student of economics except as an example of analytical pitfalls. However, his discussion of inflation-its causes and consequences-is still worth reading.

Reviewed by DOUGLAS K. ADIE

 


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