The Cultural and Spiritual Legacy of Fiat Inflation
Mises Daily Article
dailyarticle at mises.org
Wed Jul 28 05:55:15 PDT 2004
The Cultural and Spiritual Legacy of Fiat Inflation
by J.G. H|lsmann
[Posted July 28, 2004]
The notion that inflation is harmful is a staple of economic science. But
most textbooks underrate the extent of the harm, because they define
inflation much too narrowly as a lasting decrease of the purchasing power
of money (PPM), and also because they pay scant attention to the concrete
forms of inflation. To appreciate the disruptive nature of inflation in its
full extent we must keep in mind that it springs from a violation of the
fundamental rules of society.
Inflation is what happens when people increase the money supply by fraud,
imposition, and breach of contract. Invariably it produces three
characteristic consequences: (1) it benefits the perpetrators at the
expense of all other money users; (2) it allows the accumulation of debt
beyond the level debts could reach on the free market; and (3) it reduces
the PPM below the level it would have reached on the free market.
While these three consequences are bad enough, things get much worse once
inflation is encouraged and promoted by the state (fiat inflation). The
governments fiat makes inflation perennial, and as a result we observe the
formation of inflation-specific institutions and habits. Thus fiat
inflation leaves a characteristic cultural and spiritual stain on human
society. In what follows, we will take a closer look at some aspects of
I. Hyper-Centralized Government
Inflation benefits the government that controls it, not only at the expense
of the population at large, but also at the expense of all secondary and
tertiary governments. It is a well-known fact that the European kings,
during the rise of their nation states in the 17th and 18th centuries,
crushed the major vestiges of intermediate power. The democratic nation
states of the 19th and 20th centuries completed the centralization of power
that had been begun under the kings. The economic driving force of this
process was inflation, which at that point was entirely in the hands of the
central state apparatus. More than any other economic reason, it made the
nation state irresistible. And thus it contributed, indirectly at least, to
the popularity of nationalistic ideologies, which in the 20th century
ushered into a frenetic worshipping of the nation state.
Inflation spurs the growth of central governments. It allows these
governments to grow larger than they could become in a free society. And it
allows them to monopolize governmental functions to an extent that would
not occur under a natural production of money. This comes at the expense of
all forms of intermediate government, and of course at the expense of civil
society at large. The inflation-sponsored centralization of power turns the
average citizen more and more into an isolated social atom. All of his
social bonds are controlled by the central state, which also provides most
of the services that formerly were provided by other social entities such
as family and local government. At the same time, the central direction of
the state apparatus is removed from the daily life of its protigis.
II. Fiat Inflation and War
Among the most gruesome consequences of fiat money, and of paper money in
particular, is its ability to extend the length of wars. The destructions
of war have the healthy effect of cooling down initial war frenzies. The
more protracted and destructive a war becomes, therefore, the less is the
population inclined to support it financially through taxes and the
purchase of public bonds. Fiat inflation allows the government to ignore
the fiscal resistance of its citizens and to maintain the war effort on its
present level, or even to increase that level. The government just prints
the notes it needs to buy cannons and boots.
This is exactly what happened in the two world wars of the 20th century, at
least in the case of the European states. The governments of France,
Germany, Italy, Russia, and the United Kingdom covered a large part of
their expenses through inflation. It is of course difficult to evaluate any
precise quantitative impact, but it is not unreasonable to assume that fiat
inflation prolonged both wars by many months or even one or two years. If
we consider that the killings have reached their climax toward the end of
the war, we must assume that many millions of lives could have been saved.
Many people believe that, in war, all means are just. In their eyes, fiat
inflation is legitimate as a means to fend off lethal threats from a
nation. But this argument is rather defective. It is not the case that all
means are just in a war. There is in Catholic theology a theory of just
war, which stresses exactly this point. Fiat inflation would certainly be
illegitimate if less offensive means were available to attain the same end.
And fact is that such means exist and have always been at the disposition
of governments, for example, credit money and additional taxation.
Another typical line of defense of fiat money in wartime is that the
government might know better than the citizens just how close victory is at
hand. The ignorant population grows weary of the war and tends to resist
additional taxation. But the government is perfectly acquainted with the
situation. Without fiat money, its hands would be tied up, with potentially
disastrous consequences. The inflation just gives it the little extra
something needed to win.
It is of course conceivable that the government is better informed than its
citizens. But it is difficult to see why this should be an obstacle in war
finance. The most essential task of political leadership is to rally the
masses behind its cause. Why should it be impossible for a government to
spread its better information, thus convincing the populace of the need for
additional taxes? This brings us to the following consideration.
III. Inflation and Tyranny
War is just the most extreme case in which fiat inflation allows
governments to pursue their goals without genuine support from their
citizens. The printing press allows the government to tap the property of
its people without having obtained their consent, and in fact against their
consent. What kind of government is it that arbitrarily takes the property
of its citizens? Aristotle and many other political philosophers have
called it tyranny. And monetary theorists from Oresme to Mises have pointed
out that fiat inflation, considered as a tool of government finance, is the
characteristic financial technique of tyranny.
IV. Race to the Bottom in Monetary Organization
As Austrian economists have argued in some detail, fiat inflation is an
inherently unstable way of producing money because it turns moral hazard
and irresponsibility into an institution. The result is frequently
recurring economic crises. Past efforts to repair these unwelcome effects,
yet without questioning the principle of fiat inflation per se, have
entailed a peculiar evolution of monetary institutionssome sort of an
institutional "race to the bottom."
Important milestones of this process were fractional-reserve banking,
national central banking, international central banking, and finally paper
money. The devolution of monetary institutions has been on its way for
centuries, and it has still not quite reached the absolute bottom, even
though the process has accelerated very considerably in our age of paper
V. Business Under Fiat Inflation
Fiat inflation has a profound impact on corporate finance. It makes
liabilities (credits) cheaper than they would be on a free market. This
prompts entrepreneurs to finance their ventures to a greater extent than
otherwise through credits, rather than through equity (the capital brought
into the firm by its owners).
In a natural system of money production, banks would grant credit only as
financial intermediaries. That is, they could lend out only those sums of
money that they had either saved themselves or which other people had saved
and then lent to the banks. The bankers would of course be free to grant
credits under any terms (interest, securities, duration) they like; but it
would be suicidal for them to offer better terms than those that their own
creditors had granted them. For example, if a bank receives a credit at 5
percent, it would be suicidal for it to lend this money at 4 percent. It
follows that on a free market, profitable banking is constrained within
fairly narrow limits, which in turn is determined by the savers. It is not
possible for a bank to stay in business and to offer better terms than the
savers who are most ready to part with their money for some time.
But fractional-reserve banks can do precisely that. Since they can produce
additional banknotes at virtually zero cost, they can grant credit at rates
that are lower than the rates that would otherwise have prevailed. And the
beneficiaries will therefore finance some ventures through debts that they
would otherwise have financed with their own money, or which they would not
have started at all. Paper money has very much the same effect, but in a
far greater dimension. A paper-money producer can grant credits to
virtually any extent and at virtually any terms. In the past few years, the
Bank of Japan has offered credits at 0 percent interest, and it right now
proceeds in some cases to actually pay people for taking its credits.
It is obvious that few firms can afford to resist such offers. Competition
is fierce in most industries, and the firms must seek to use the best terms
available, lest they lose that "competitive edge" that can be decisive for
profits and also for mere survival. It follows that fiat inflation makes
business more dependent on banks than they otherwise would be. It creates
greater hierarchy and central decision-making power than would exist on the
free market. The entrepreneur who operates with 10 percent equity and 90
percent debts is not really an entrepreneur anymore. His creditors (usually
bankers) are the true entrepreneurs who make all essential decisions. He is
just a more or less well-paid executivea manager.
Thus fiat inflation reduces the number of true entrepreneursindependent
men who operate with their own money. Such men still exist in astonishing
numbers, but they can only survive because their superior talents match the
inferior financial terms with which they have to cope. They must be more
innovative and/or work harder than their competitors. They know the price
of independence and they are ready to pay it. Usually they are more
attached to the family business and care more for their employees than the
puppets of bankers.
Because credits springing from fiat inflation provide an easy financial
edge, they have the tendency to encourage reckless behavior by the chief
executives. This is especially the case with managers of large corporations
who have easy access to the capital markets. Their recklessness is often
confused with innovativeness.
The economist Josef Schumpeter has famously characterized
fractional-reserve banking as some sort of a mainspring of innovative
economic development, because it provides additional money for
entrepreneurs with great ideas.
It is conceivable that in some cases it played this role, but the odds are
overwhelmingly on the other side. As a general rule, any new product and
any thoroughgoing innovation in business organization is a threat for
banks, because they are already more or less heavily invested in
established companies, which produce the old products and use the old forms
of organization. They have therefore every incentive to either prevent the
innovation by declining to finance it, or to communicate the new ideas to
their partners in the business world.
Thus, factional-reserve banking makes business more conservative than it
otherwise would be. It benefits the established firms at the expense of
innovative newcomers. Innovation is much more likely to come from
independent businessmen, especially if income taxation is low.
VI. The Debt Yoke
Some of the foregoing considerations also apply outside of the business
world. Fiat inflation provides easy credits not only to governments and
firms, but also to private persons. The mere fact that such credits are
offered at all incites some people to go into debt who would otherwise have
chosen not to do so. But easy credits become nearly irresistible in
connection with another typical consequence of inflation, namely, the
constantly rising price level. Whereas in former times the increase of
prices has been barely noticeable, in our day all citizens of the western
world are aware of the phenomenon. In countries such as Turkey or Brazil,
where prices increase at annual rates of 80 to 100 percent, even younger
people have personally experienced it.
Such conditions impose a heavy penalty on cash savings. In the old days,
saving was typically done in the form of hoarding gold and silver coins. It
is true that such hoards did not provide any revenuethe metal was
"barren"and that they therefore did not lend themselves to the lifestyle
of rentiers. But in all other respects money hoards were a reliable and
effective form of saving. Their purchasing power did not just evaporate in
a few decades, and in times of economic growth they even gained some
Most importantly, they were extremely suitable for ordinary people.
Carpenters, masons, tailors, and farmers are usually not very astute
observers of the international capital markets. Putting some gold coins
under their pillow or into a safe deposit box saved them lots of sleepless
nights, and it made them independent of financial intermediaries.
Now compare this old-time scenario with our present situation. The contrast
could not be starker. It would be completely pointless in our day to hoard
dollar or euro notes to prepare for retirement. A man in his thirties who
plans to retire thirty years from today (2004) must calculate with a
depreciation factor in the order of 3. That is, he needs to save three
dollars today to have the purchasing power of one of these present-day
dollars when he retires. And the estimated depreciation factor of 3 is
rather on the low side!
It follows that the rational saving strategy for him is to go into debt in
order to buy assets the price of which will increase with the inflation.
This is exactly what happens today in most western countries. As soon as
young people have a job and thus a halfway stable source of revenue, they
take a credit to buy a housewhereas their great-grandfather might still
have first accumulated savings for some thirty years and then bought his
house in cash. Needless to say that the latter has always been the
Christian way. In Saint Pauls letter to the Romans (13:8) we read: "Owe
nothing to anyone, except to love one another; for the one who loves
another has fulfilled the law."
Things are not much better for those who have already accumulated some
wealth. It is true that inflation does not force them into debt, but in any
case it deprives them of the possibility of holding their savings in cash.
Old people with a pension fund, widows, and the wardens of orphans must
invest their money into the financial markets, lest its purchasing power
evaporate under their noses. Thus they become dependent on intermediaries
and on the vagaries of stock and bond pricing.
It is clear that this state of affairs is very beneficial for those who
derive their living from the financial markets. Stockbrokers, bond dealers,
banks, mortgage corporations, and other "players" have reason to be
thankful for the constant decline of moneys purchasing power under fiat
inflation. But is this state of affairs also beneficial for the average
citizen? In a certain sense, his debts and increased investment in the
financial markets are beneficial for him, given our present inflationary
When the increase of the price level is perennial, private debt is for him
the best available strategy. But this means of course that without
government interventionism into the monetary system other strategies would
be superior. The presence of central banks and paper money make debt-based
financial strategies more attractive than strategies based on prior savings.
It is not an exaggeration to say that, through their monetary policy,
Western governments have pushed their citizens into a state of financial
dependency unknown to any previous generation. Already in 1931, Pius XI
[. . .] it is obvious that not only is wealth concentrated in our times but
an immense power and despotic economic dictatorship is consolidated in the
hands of a few, who often are not owners but only the trustees and managing
directors of invested funds which they administer according to their own
arbitrary will and pleasure.
This dictatorship is being most forcibly exercised by those who, since they
hold the money and completely control it, control credit also and rule the
lending of money. Hence they regulate the flow, so to speak, of the
life-blood whereby the entire economic system lives, and have so firmly in
their grasp the soul, as it were, of economic life that no one can breathe
One wonders what vocabulary Pius XI would have used to describe our present
situation. The usual justification for this state of affairs is that it
allegedly stimulates industrial development. The money hoards of former
times were not only sterile; they were actually harmful from an economic
point of view, because they deprived business of the means of payments they
needed for investments. The role of inflation is to provide these means.
However, money hoarding does not have any negative macroeconomic
implications. It does definitely not stifle industrial investments.
Hoarding increases the purchasing power of money and thus gives greater
"weight" to the money units that remain in circulation. All goods and
services can be bought, and all feasible investments can be made with these
remaining units. The fundamental fact is that inflation does not bring into
existence any additional resource. It merely changes the allocation of the
existing resources. They no longer go to companies that are run by
entrepreneurs who operate with their own money, but to business executives
who run companies financed with bank credits.
The net effect of the recent surge in household debt is therefore to throw
entire populations into financial dependency. The moral implications are
clear. Towering debts are incompatible with financial self-reliance and
thus they tend to weaken self-reliance also in all other spheres. The
debt-ridden individual eventually adopts the habit of turning to others for
help, rather than maturing into an economic and moral anchor of his family,
and of his wider community. Wishful thinking and submissiveness replace
soberness and independent judgment. And what about the many cases in which
families can no longer shoulder the debt load? Then the result is either
despair or, on the contrary, scorn for all standards of financial sanity.
VII. Some Spiritual Casualties of Fiat Inflation
Fiat inflation constantly reduces the purchasing power of money. To some
extent, it is possible for people to protect their savings against this
trend, but this requires thorough financial knowledge, the time to
constantly supervise ones investments, and a good dose of luck. People who
lack one of these ingredients are likely to lose a substantial part of
their assets. The savings of a lifetime often vanish in thin air during the
last few years spent in retirement. The consequence is despair and the
eradication of moral and social standards. But it would be wrong to infer
that inflation produces this effect mainly among the elderly. As one writer
These effects are "especially strong among the youth. They learn to live in
the present and scorn those who try to teach them old-fashioned morality
and thrift. Inflation thereby encourages a mentality of immediate
gratification that is plainly at variance with the discipline and eternal
perspective required to exercise principles of biblical stewardshipsuch as
long-term investment for the benefit of future
Even those citizens who are blessed with knowledge, time, and luck to
protect the substance of their savings cannot evade inflations harmful
impact, because they have to adopt habits that are at odds with moral and
spiritual health. Inflation forces them to spend much more time thinking
about their money than they otherwise would. We have noticed already that
the old way for ordinary citizens to make savings was the accumulation of
cash. Under fiat inflation this strategy is suicidal. They must invest into
assets the value of which grows during the inflation; the most practical
way to do this is to buy stocks and bonds. But this entails many hours
spent on comparing and selecting appropriate titles. And it compels them to
be ever watchful and concerned about their money for the rest of their
lives. They need to follow the financial news and monitor the price
quotations on the financial markets.
Similarly, people will tend to prolong the phase of their life in which
they strive to earn money. And they will place relatively greater emphasis
on monetary returns than on any other criterion for choosing their
profession. For example, some of those who would rather be inclined to
gardening will nevertheless seek an industrial employment because the
latter offers greater long-run monetary returns. And more people will
accept employment far from home, because it allows them to earn just some
little extra money, than under a natural monetary system.
The spiritual dimension of these inflation-induced habits seems to be
obvious. Money and financial questions come to play an exaggerated role in
the life of man. Inflation makes society materialistic. More and more
people strive for money income at the expense of personal happiness.
Inflation-induced geographical mobility artificially weakens family bonds
and patriotic loyalty. Many of those who tend to be greedy, envious, and
niggardly anyway fall prey to sin. Even those who are not so inclined by
their natures will be exposed to temptations they would not otherwise have
felt. And because the vagaries of the financial markets also provide a
ready excuse for an excessively parsimonious use of ones money, donations
for charitable institutions will decline.
Then there is the fact that perennial inflation tends to deteriorate
product quality. Every seller knows that it is difficult to sell the same
physical product at higher prices than in previous years. But increasing
money prices are unavoidable when the money supply is subject to relentless
growth. So what do sellers do? In many cases the rescue comes through
technological innovation, which allows for a cheaper production of the
product, thus neutralizing or even overcompensating the countervailing
influence of inflation. This is, for example, the case with personal
computers and other equipment built with a large input of information
But in other industries, technological progress plays a much smaller role.
Here the sellers confront the above-mentioned problem. They then fabricate
an inferior product and sell it under the same name, along with the
euphemisms that have become customary in commercial marketing. For example,
they might offer their customers "light" coffee and "non-spicy"
vegetableswhich translates into thin coffee and vegetables that have lost
any trace of flavor. Similar product deterioration can be observed in the
construction business. Countries plagued by perennial inflation seem to
have a greater share of houses and streets that are in constant need of
repair than other countries.
In such an environment, people develop a more than sloppy attitude toward
their language. If everything is what it is called, then it is difficult to
explain the difference between truth and lie. Inflation tempts people to
lie about their products, and perennial inflation encourages the habit of
routine lies. The present writer has argued in other works that routine
lies play a great role in fractional-reserve banking, the basic institution
of the fiat money system. Fiat inflation seems to spread this habit like a
cancer over the rest of the economy.
VIII. Suffocating the Flame
In most countries, the growth of the welfare state has been financed
through the accumulation of public debt on a scale that would have been
unthinkable without fiat inflation. A cursory glance at the historical
record shows that the exponential growth of the welfare state, which in
Europe started in the early 1970s, went in hand with the explosion of
public debt. It is widely known that this development has been a major
factor in the decline of the family. But it is commonly overlooked that the
ultimate cause of this decline is fiat inflation. Perennial inflation
slowly but assuredly destroys the family, thus suffocating the earthly
flame of Christian morals.
The Christian family is the most important "producer" of a certain type of
morals. Family life is possible only if all members endorse norms such as
the legitimacy of authority, the heterosexual union between man and woman,
and the prohibition of incest. And Christian families are based on
additional norms such as the love of the spouses for one another and for
their offspring, the respect of children for their parents, the reality of
the Triune God, the truth of the Christian faith, etc. Parents constantly
repeat, emphasize, and live these norms. This daily experience
"brainwashes" all family members into accepting them as the normal state of
affairs. In the wider social sphere, then, these persons act as advocates
of the same norms in business associations, clubs, and politics.
Friends and foes of the traditional Christian family agree on these facts.
It is among other things because they recognize the familys effectiveness
in establishing social norms that Christians seek to protect it. And it is
precisely for the same reason that advocates of moral license seek to
destroy it. The welfare state has been their preferred tool for the past
thirty years. Today the welfare state provides a great number of services
that in former times were provided by families (and which, we may assume,
would still be provided to a large extent by families if the welfare state
ceased to exist). Education of the young, care for the elderly and the
sick, assistance in times of emergenciesall of these services are today
effectively "outsourced" to the state. The families have been degraded into
small production units that share utility bills, cars, refrigerators, and
of course the tax bill. The tax-financed welfare state then provides them
with education and
>From an economic point of view, this arrangement is a pure waste of money.
The fact is that the welfare state is inefficient; it provides
comparatively lousy services at comparatively high costs. We need not dwell
on the inability of government welfare agencies to provide the emotional
and spiritual assistance that only springs from charity. Compassion cannot
be bought. But the welfare state is also inefficient in purely economic
terms. It operates through large bureaucracies and is therefore liable to
lack incentives and economic criteria that would prevent the wasting of
money. In the words of Pope John Paul II:
By intervening directly and depriving society of its responsibility, the
Social Assistance State leads to a loss of human energies and an inordinate
increase of public agencies, which are dominated more by bureaucratic ways
of thinking than by concern for serving their clients, and which are
accompanied by an enormous increase in spending. In fact, it would appear
that needs are best understood and satisfied by people who are closest to
them and who act as neighbours to those in need. It should be added that
certain kinds of demands often call for a response which is not simply
material but which is capable of perceiving the deeper human
Everyone knows this from first-hand experience, and a great number of
scientific studies drive home the same point. It is precisely because the
welfare state is an inefficient economic arrangement that it must rely on
taxes. If the welfare state had to compete with families on equal terms, it
could not stay in business for any length of time. It has driven the family
and private charities out of the "welfare market" because people are forced
to pay for it anyway. They are forced to pay taxes, and they cannot prevent
the government from floating ever-new loans, which absorb the capital that
otherwise would be used for the production of different goods and services.
The excessive welfare state of our days is an all-out direct attack on the
producers of Christian morals. But it weakens these morals also in indirect
ways, most notably by subsidizing bad moral examples. The fact is that some
alternative "life styles" carry great economic risks and therefore tend to
be more expensive than the traditional family arrangements. The welfare
state socializes the costs of such behavior and therefore gives it far
greater prominence than it would have in a free society.
Rather than carrying an economic penalty, public license might then
actually go hand in hand with economic advantages, because it dispenses the
protagonists from the costs of family life (for example, the costs
associated with raising children). With the backing of the welfare state,
these protagonists may mock conservative morals as some sort of
superstition that has no real-life impact. The spiritual dimension seems to
be clear: The welfare state systematically exposes people to the temptation
of believing that there are no time-tested moral precepts at all.
Let us emphasize that the point of the preceding observations was not to
attack welfare services, which are in fact an essential component of
Christian societies. The point is, rather, that fiat inflation destroys the
democratic control over the provision of these services; that this
invariably leads to excessive growth of the aggregate welfare system and to
excessive forms of welfare; and that this in turn is not without
consequences for the moral and spiritual character of the population.
The foregoing considerations are by no means an exhaustive account of the
cultural and spiritual legacy of fiat inflation. But they should suffice to
substantiate the main point: that fiat inflation is a powerhouse of social,
economic, cultural, and spiritual destruction.
J.G. H|lsmann is senior fellow of the Mises Institute. This is an excerpt
from his book forthcoming from the Acton Institute.
<mailto:jgh at mises.org>jgh at mises.org. Comment on the
Anno (1931), '' 105, 106. See also Deuteronomy 28: 12, 4344.
Woods, "<http://www.acton.org/publicat/randl/article.php?id=474>Money and
Morality: The Christian Moral Tradition and the Best Monetary Regime,"
Religion & Liberty, vol. 13, no. 5 (Sept./Oct. 2003). The author quotes
Ludwig von Mises.
<http://www.mises.org/fullstory.aspx?control=1570#_ftnref4> In many
countries it is today possible for families to deduct expenses for private
care and private education from the annual tax bill. But ironically (or
maybe not quite so ironically) this trend has reinforced the erosion of the
family. For example, recent provisions of the U.S. tax code allow family
budgets to increase through such deductionsbut only if the deductible
services are not provided at home, but bought from other people.
<http://www.mises.org/fullstory.aspx?control=1570#_ftnref5> John Paul
Annus, ' 48.
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