The Theory of Money and Credit - Ludwig von Mises [94]
Other inflationists realize very well that an increase in the quantity of money reduces the purchasing power of the monetary unit. But they endeavor to secure inflation nonetheless, because of its effect on the value of money; they want depreciation, because they want to favor debtors at the expense of creditors and because they want to encourage exportation and make importation difficult. Others, again, recommend depreciation for the sake of its supposed property of stimulating production and encouraging the spirit of enterprise.
Depreciation of money can benefit debtors only when it is unforeseen. If inflationary measures and a reduction of the value of money are expected, then those who lend money will demand higher interest in order to compensate their probable loss of capital, and those who seek loans will be prepared to pay the higher interest because they have a prospect of gaining on capital account. Since, as we have shown, it is never possible to foresee the extent of monetary depreciation, creditors in individual cases may suffer losses and debtors make profits, in spite of the higher interest exacted. Nevertheless, in general it will not be possible for any inflationary policy, unless it takes effect suddenly and unexpectedly, to alter the relations between creditor and debtor in favor of the latter by increasing the quantity of money. [4] Those who lend money will feel obliged, in order to avoid losses, either to make their loans in a currency that is more stable in value than the currency of their own country, or to include in the rate of interest they ask, over and above the compensation that they reckon for the probable depreciation of money and the loss to be expected on that account, an additional premium for the risk of a less probable further depreciation. And if those who were seeking credit were inclined to refuse to pay this additional compensation, the diminution of supply in the loan market would force them to it. During the inflation after the war it was seen how savings deposits decreased because savings banks were not inclined to adjust interest rates to the altered conditions of the variations in the purchasing power of money.
It has already been shown in the preceding chapter that it is a mistake to think that the depreciation of money stimulates production. If the particular conditions of a given case of depreciation are such that wealth is transferred to the rich from the poor, then admittedly saving (and consequently capital accumulation) will be encouraged, production will consequently be stimulated, and so the welfare of posterity increased. In earlier epochs of economic history a moderate inflation may sometimes have had this effect. But the more the development of capitalism has made money loans (bank and savings-bank deposits and bonds, especially bearer bonds and mortgage bonds) the most important instruments of saving, the more has depreciation necessarily imperiled the accumulation of capital, by decreasing the motive for saving. How the depreciation of money leads to capital consumption through falsification of economic calculation, and how the appearance of a boom that it creates is an illusion, and how the depreciation of the money really reacts on foreign trade have similarly been explained already in the preceding chapter.
A third group of inflationists do not deny that inflation involves serious disadvantages. Nevertheless, they think that there are higher and more important aims of economic policy than a sound monetary system. They hold that although inflation may be a great evil, yet it is not the greatest evil, and that the state might under certain circumstances find itself in a position where it would do well to oppose greater evils with the lesser evil of inflation. When the defense of the fatherland against enemies, or the rescue of the hungry from starvation is at stake, then, it is said, let the currency go to ruin whatever the cost.
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