A secular tendency toward a rise in the monetary unit's purchasing power would require rules of thumb on the part of businessmen and investors other than those developed under the secular tendency toward a fall in its purchasing power. But it would certainly not influence substantially the course of economic affairs. It would not remove the urge of people to improve their material well-being as far as possible by an appropriate arrangement of production. It would not deprive the economic system of the factors making for material improvement, namely, the striving of enterprising promoters after profit and the readiness of the public to buy those commodities which are apt to provide them the greatest satisfaction at the lowest costs.
Such observations are certainly not a plea for a policy of deflation. They imply merely a refutation of the ineradicable inflationist fables. They unmask the illusiveness of Lord Keyne's doctrine that the source of poverty and distress, of depression of trade, and of unemployment is to be seen in a "contractionist pressure." It is not true that "a deflationary pressure ... would have ... prevented the development of modern industry." It is not true that credit expansion brings about the "miracle ... of turning a stone into bread."
Economics recommends neither inflationary not deflationary policy. It does not urge the governments to tamper with the market's choice of a medium of exchange. It establishes only the following truths:
1. By committing itself to an inflationary or deflationary policy a government does not promote the public welfare, the commonweal, or the interests of the whole nation. It merely favors one or several groups of the population at the expense of other groups.
2. It is impossible to know in advance which group will be favored by a definite inflationary or deflationary measure and to what extent. These effects depend on the whole complex of the market data involved. They also depend largely on the speed of the inflationary or deflationary movements and may be completely reversed with the progress of these movements.
3. At any rate, a monetary expansion results in misinvestment of capital and overconsumption. It leaves the nation as a whole poorer, not richer. These problems are dealt with in Chapter XX. [p. 471]
4. Continued inflation must finally end in the crack-up boom, the complete breakdown of the currency system.
5. Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous.
. Cf. the critical study of Marianne von Herzfeld, "Die
Geschichte als Funktion der Geldbewegung," Archiv fuer Sozialwissenschaft,
LVI, 654-686, and the writings quoted in this study.
. Cf. below, pp. 541-545.
. Quoted from: International Clearing Union, Text of a Paper
Containing Proposals by British Experts for an International Clearing Union, April 8, 1943
(published by British Information Services, an Agency of the British Government), p. 12.