"Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their consciences." ~ C.S. Lewis
The Sacred Cow of Inflation
Exclusive to STR
April 16, 2008
No one has ever died from inflation directly, yet it constitutes a serious threat to our existence. By 'inflation' I mean a policy of increasing the money supply, the root cause of the booms that inevitably go bust. Using this traditional idea of inflation--which, it should be mentioned, is regarded as contrived by most economists today--in what sense can it be considered so dangerous?
Especially when a simple perusal of the facts suggests otherwise.
Consider the political landscape. Can you name a country whose government or government-friendly central bank doesn't inflate its currency? I can't. A central bank that didn't inflate the money supply wouldn't be doing its job. Central bankers talk about price stability and fostering maximum employment, but they exist to prop up the big commercial banks and the government, and they do that by printing money (shorthand for 'open market' purchases). As far as I know, every country on earth is exposed to inflationist policies, and not one--not even Germany in the 1920s, Hungary in the 1940s, or Bolivia in the 1980s, as examples where inflation hit the stratosphere--has perished because of inflation. Even in Zimbabwe , where the government has worked overtime to destroy their currency, people are surviving. They're even trying to hold an election. Most people regard elections as the hallmark of civilization.
In addition, there is almost universal agreement among economists that some inflation is necessary for a smooth-running economy. If the experts are correct, the implication of their position is obvious: if anything, the lack of inflation is a threat to our survival. Even Nobel Laureate Milton Friedman, who became the spokesperson for free markets in spite of interventionist policy recommendations, thought people should not be free to choose about inflation. For decades, Friedman thought it would be a good idea if the Fed set up a rule about how much to inflate, then followed that rule faithfully, though late in life he apparently backed away from this view. And though Lord Keynes has lost some of his luster since the stagflation days of the 1970s, he's still a popular icon among policymakers. You could comb the economics departments of the finest universities, knock on the door of any think tank, scour the blogs, talk to any politician, and only rarely trip over a renegade who condemns inflation altogether. Most of them seem to view inflation as they would a vitamin supplement: essential to good health, as long as you don't overdo it.
Ben Bernanke co-authored a book called Inflation Targeting in which he said that 'low, stable inflation is monetary policy's primary long-run goal.' [p. 4] Ben Bernanke taught himself calculus as a teenager, scored 1590 out of 1600 on the SAT , graduated summa cum laude from Harvard, earned his Ph.D. from MIT, taught at Stanford, chaired the economics department at Princeton . Ben Bernanke is now head of the most powerful central bank in the history of the world. Ben Bernanke, a family man and one of the smartest men alive--truly--believes in the beneficial effects of the U.S. government's printing press.
What possible evidence could exist to suggest that inflation is a threat to our survival?
Ideas shape the world
The most popular idea in the world is freedom: 'the power to act or speak or think without externally imposed restraints.' But if this is true, how come it keeps slipping away?
In a word, government. The more government there is, the less freedom we have. And government grows best when it engages in war.
As many writers have noted, World War I was a watershed event in the 20th Century. The blunders and delusions of the warring governments had to be paid for, and prior to the assassination that provoked the outbreak of war in 1914, all the governments were managing what they called the gold standard.   It is no coincidence that with the exception of the U.S., which entered the war late, they all abandoned this standard when they decided to settle their differences in battle. The alternative would've been to raise taxes to an intolerable level. Politicians were well aware that support for the war would fade fast, even with their propaganda machines running at redline, if people knew how much it was costing them. Better for their war plans to suspend gold redemption and run the printing presses.
Consider for a moment what the governments didn't do. They didn't say to their central banks or treasuries, 'Go dig up tons more gold. We're going to war, and we'll need the money to pay for it.' It sounds ludicrous because everyone knows it couldn't be done. Gold is too hard to find and extract.
Government has no use for a money that's scarce: it limits its reach. It limits its reach by limiting its ability to inflate. 
Not even the horrendous level of casualties turned the public against the war. They were told the enemy was a threat to civilization and had to be wiped out at all costs, and the civilians believed that the privations they endured, including higher taxes, was the price they were paying. Most people didn't understand the printing press effect.
After the war, with their currencies badly debased, governments adopted gold standards made of straw, and thus it was easy to scapegoat gold when the Depression arrived. After the breakdown of subsequent international monetary agreements, the world today is on competing fiat standards, with the gold standard regarded as a barbarous relic and the Fed growing stronger with each crisis it creates.
Where's the lethal threat of inflation?
War requires massive funds, and the easiest way to get them is with the government's printing press. And therein lies inflation's grave danger, as this exchange from The Flight of the Barbarous Relic suggests:
- 'What would that do for war if governments had to pay for it with taxes?'
- 'Make it an endangered species.'
- 'So if you're a government bent on war'"
- 'Inflation is a sacred cow.'
If inflation is viewed solely as the systematic depreciation of our currency and the cause of financial crises, it might crush us financially but it wouldn't necessarily destroy our civilization. But in its function as a stealth tax, especially as it helps government bankroll unnecessary wars in an age of nuclear and biological weapons, it stands as a threat to all human life.
'War is the health of the state,' Randolph Bourne proclaimed in 1918.  Given inflation's indispensable role in war and military build-up, we should also consider inflation the health of the state.
1. The British blundered in believing a German victory would end British financial dominance. And regarding the U.S. , Colonel House nurtured Wilson 's delusion that he would be the 'Savior of the World' and the new 'Prince of Peace' if he intervened on the side of the British. See John V. Denson, A Century of War, pp. 117-122.
2. Governments intervened in the gold standard by monopolizing of the mint, legal tender laws, the creation of paper money, and establishing a legal framework for inflationary banking. See Murray Rothbard, What Has Government Done to Our Money.
4. 'The modern State is not the rational and intelligent product of modern men desiring to live harmoniously together with security of life, property, and opinion. It is not an organization which has been devised as pragmatic means to a desired social end. All the idealism with which we have been instructed to endow the State is the fruit of our retrospective imaginations. What it does for us in the way of security and benefit of life, it does incidentally as a by-product and development of its original functions . . .' Bourne, War is the Health of the State.