Money Mischief_ Episodes in Monetary History - Milton Friedman [81]
Moreover, many of us are not unhappy about inflation. Naturally, we would like to see the prices of the things we buy go down, or at least stop going up. But we are glad to see the prices of the things we sell go up—whether it is goods we produce, our labor services, or houses or other items that we own. We saw in chapters 3 and 5 how the desire for inflation animated the populists and generated support for free silver. More recently, farmers have complained about inflation but have congregated in Washington to lobby for higher prices for their own products. Most of us do the same in one way or another. That is why our inflation binge lasted so long, from the early 1960s to the early 1980s, and why inflation remains a continued threat.
One reason inflation is so destructive is because some people benefit greatly and others suffer; society is divided into winners and losers. The winners regard the good things that happen to them as the natural result of their own foresight, prudence, and initiative. They regard the bad things—the rise in the prices of the things they buy—as the fault of forces outside their control. Almost all of us will say that we are against inflation; what we generally mean is that we are against the bad things about it that have happened to us.
For example, almost every person who owned a home during the 1960s and 1970s benefited from inflation. The value of the home rose sharply. If the owner had a mortgage, the interest rate was generally below the rate of inflation. As a result, the payments called interest, as well as those called principal, in effect paid off the mortgage. To take a simple case, suppose that both the interest rate and the inflation rate were 7 percent in one year. If a homeowner had a $10,000 mortgage on which he paid only the interest, a year later the mortgage would correspond to the same buying power as $9,300 would have a year earlier. In real terms, he would owe $700 less—just the amount he paid as interest. In real terms, he would have paid nothing for the use of the $10,000. (Indeed, because the interest was deductible in computing his income tax, he would actually have benefited—would have been paid for borrowing.) This effect became apparent to homeowners as their equity in their houses went up rapidly. The counterpart was the loss to the small savers who provided the funds that enabled savings and loan associations, mutual savings banks, and other institutions to finance mortgage loans. The small savers had no good alternative because the government limited narrowly the maximum interest rate that such institutions could pay to their depositors—supposedly to protect the depositors. The loss ultimately showed up on the national level in the collapse of the savings and loan industry and the accompanying burden on taxpayers.
Just as higher government spending can contribute to excessive monetary growth, so lower government spending can contribute to reduced monetary growth. Here, too, we tend to be schizophrenic. We would all like to see government spending go down, provided it is not spending that benefits us. We would all like to see deficits reduced, provided it is through taxes imposed on others.
As inflation accelerates, sooner or later it does so much damage to the fabric of society, creates so much injustice and suffering, that a genuine public will develops to do something about it—as we saw happen in the United States in 1980. The level of inflation at which that may occur depends critically on the country in question and its history. In Germany, the will to do something came at a low level of inflation because of Germany's terrible experiences after World Wars I and II; the will came at a much higher level of inflation in the United Kingdom, Japan, and the United States.
Side Effects of a Cure
Before the United States took the cure, and