Money Mischief_ Episodes in Monetary History - Milton Friedman [80]
The Cure for Inflation
The cure for inflation is simple to state but hard to implement. Just as an excessive increase in the quantity of money is the one and only important cause of inflation, so a reduction in the rate of monetary growth is the one and only cure for inflation. The problem is not one of knowing what to do. That is easy enough—government must increase the quantity of money less rapidly. The problem is to have the political will to take the necessary measures. Once the inflationary disease is in an advanced state, the cure takes a long time and has painful side effects.
Two medical analogies illustrate the nature of the problem. One analogy is about a young man who had Buerger's disease, a disease that interrupts the blood supply and can lead to gangrene. The young man was losing his fingers and toes. The cure was simple to state: stop smoking. But the young man did not have the will to do so; his addiction to tobacco was too great. His disease was in one sense curable, in another not.
A more instructive analogy is one between inflation and alcoholism. When the alcoholic starts drinking, the good effects come first; the bad effects come only the next morning, when he wakes up with a hangover—and often cannot resist easing the hangover by taking "the hair of the dog that bit him."
The parallel with inflation is exact. When a country starts on an inflationary episode, the initial effects seem good. The increased quantity of money enables whoever has access to it—nowadays, primarily governments—to spend more without anybody else having to spend less. Jobs become more plentiful, business is brisk, almost everybody is happy—at first. Those are the good effects. But then the increased spending starts to raise prices. Workers find that their wages, even if higher in dollars, will buy less; businesses find that their costs have risen, so that the higher sales are not as profitable as had been anticipated, unless prices can be raised even faster. The bad effects are emerging: higher prices, less buoyant demand, inflation combined with stagnation. As with the alcoholic, the temptation is to increase the quantity of money still faster, which produces the kind of roller coaster the United States has been on. In both cases, it takes a larger and larger amount, of alcohol or of money, to give the alcoholic or the economy the same "kick."
The parallel between alcoholism and inflation carries over to the cure. The cure for alcoholism is simple to state: stop drinking. But the cure is hard to take because this time the bad effects come first, the good effects later. The alcoholic who goes on the wagon suffers severe withdrawal pains before emerging in the happy state of no longer having that almost irresistible desire for another drink. So also with inflation. The initial side effects of a slower rate of monetary growth are painful: lower economic growth and temporarily higher unemployment without, for a time, much reduction in inflation. The benefits begin to appear only after one or two years or so, in the form of lower inflation, a healthier economy, the potential for rapid noninflationary growth.
The 1980s provide a clear example of this sequence. In 1980 the Federal Reserve stepped hard on the monetary brakes. The result was a severe recession and then a sharp decline in inflation. In late 1982 the Fed changed course and increased monetary growth. The economy picked up shortly afterward and embarked on its longest post—World War II expansion. The bad effects came first, the good ones later. And the country benefited greatly from taking the cure.
The painful side effects are one reason why the alcoholic and the inflationary nation both find it difficult to end their addictions. But another reason, at least in the earlier stages of the disease, may be even more important: the absence of a real desire to end the addiction. The drinker enjoys his liquor; he finds it hard to admit, even to himself, that he really is an alcoholic, and he is not sure he wants to take the cure. The inflationary nation