Tuesday, August 18, 2009

Why Inflate?

"John Maynard Keynes is usually thought of as the architect of modern inflationary policies designed to prevent economic deflations, but before his depression-era work he had made more clear than anybody else, perhaps, why governments embark on inflationary policies. They have discovered what the Roman emperors who debased the coinage knew: such policies are profitable to governments. Keynes asked us to imagine a government that increases the stock of money from nine million to twelve million currency notes without other conditions being changed. In taking this step, it has transferred from the public to itself an amount of resources equal to three million currency notes "just as successfully as if it had raised this sum in taxation." Who paid the inflation tax? Those who held the original nine million notes, because each of those notes will purchase 25 percent less than before the inflation. The inflation of currency means its depreciation in value. "The burden of the tax is well spread, cannot be evaded, costs nothing to collect, and falls, in a rough sort of way, in proportion to the wealth of the victim. No wonder its superficial advantages have attracted Ministers of Finance." That is why, said Keynes, the currency notes of a country that is inflating its money supply are the equivalent of income tax receipts of a country that has honest money."

--From Idols For Destruction, pages 96-97

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