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Subject: The Cultural and Spiritual Legacy of Fiat Inflation
Date: Wed, 28 Jul 2004 08:55:15 -0400
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The Cultural and Spiritual Legacy of Fiat Inflation
by J.G. Hülsmann
[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
this legacy.
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 protégés.
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, fi
