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Inflation Destroys Savings

Ludwig von Mises & Bettina Bien Greaves
Ludwig von Mises Institute
May 18, 2010

[Excerpted from Ludwig von Mises on Money and Inflation: A Synthesis of Several Lectures, compiled by Bettina Bien Greaves. This lecture was given at the Foundation for Economic Education (FEE).]

Everything that is done by a government against the purchasing power of the monetary unit is, under present conditions, done against the middle classes and the working classes of the population. Only these people don't know it. And this is the tragedy. The tragedy is that the unions and all these people are supporting a policy that makes all their savings valueless. And this is the great danger of the whole situation.

The conditions under which people are living in the industrial countries of the West, which today means in practically all the countries where the standard of civilization has made some progress since the 16th or 17th century, the masses are in a position, fortunately, in the years in which they are able to work, in which they are in full health, to provide for the state of affairs as it will prevail in later years when they will either be absolutely unfit to work, or when their capacity to work will have decreased on account of old age or other changes.

Under conditions as they are today, these people can only provide for their old age practically by either entering into labor contracts that give them a pension for their later age, or they can save a part of their income and invest it in such a way that they can use it in later years. These investments can be either simple savings deposits with banks, or they can be life-insurance policies or bonds, for instance, government bonds that appear in many countries as perfectly safe. In all these cases the future of these people who are providing in this way for their old age, for their families and children, is closely connected with the purchasing power of the monetary unit.

The man who owns an agricultural estate, the producer of oil or of foods, or the businessman who owns a factory is in a different position. When the prices of the products that he is selling go up on account of the inflation, he will not be hurt in the same way in which other people are hurt by the inflation. The owner of common stock will see that, by and large, most of this common stock is going up in price to the same degree as the prices of commodities are going up on account of the inflation.

But it is different for people with fixed incomes. The man who retired 25 years ago with a yearly pension, let us say of $3,000, was by and large in a good situation or was believed to be in a good situation. But this was at a time when prices were much lower than they are today. I don't want to say any more about this situation and the consequences and effects of inflation for the people.

What I want to point out is that the greatest problem today is precisely this, although the people don't realize it. The danger is due to the fact that people consider inflation as something that hurts other people. They realize very well that they too have to suffer because the prices of the commodities they are buying go up continually, but they don't realize fully that the greatest danger for them is precisely the progress of inflation and the effect it will have on the value of their savings.

All over Europe today you see unrest due to the fact that the European masses are discovering that they have been the losers in all these financial operations, which their own governments have considered as a very wonderful thing. And, therefore, also from the point of view of making it possible for the masses to enjoy the improvement of economic conditions and to make them partners, real partners, in the great development of industrial production that is going on practically now already in all countries of Europe and North America, even including Mexico, it is necessary to abandon the policy of inflation.

The great unrest that is today characteristic of everything that is going on in Europe, the revolutionary ideas of the masses, especially of the sons of the middle classes who are studying at the universities, are due to the fact that the European governments, with the exception perhaps of the government of the little country Switzerland and other such very small countries, have in the last 60 years again and again embarked upon a policy of limitless inflation.[1]

When talking about conditions in France, one should not overlook what inflation actually means. The French were right when, in the 19th century and in the beginning of our century, they declared that the social stability and the welfare of France is to a great extent based upon the fact that the masses of the French population are owners of government-issued bonds and therefore consider the financial welfare of the country, of the government, as their own financial advantage. And now this has been destroyed.

Frenchmen who were not in business themselves, i.e., the majority of the population, were fanatical savers. All their savings were destroyed when the tremendous inflation reduced the value of the franc to practically nothing. The French franc may not have declined completely to zero, but for a Frenchman, who had $100 before and then had only $1 — for such a Frenchman, the difference was not very great. Only a very few people can still consider themselves owners of some property when their property is reduced to 1 percent of what it was before.

In talking about inflation, we should not forget that over and above the consequences of destroying a country's monetary standard, there is the danger that depriving the masses of their savings will make them desperate. For decades there were only a very few who would agree with me in this position. Even so, I was astonished to read today in Newsweek that the majority of the people in the nation are not interested in the preservation of the purchasing power of the monetary unit. Unhappily, the article did not say that the destruction of the savings of the masses was a much more serious matter than the famous war now being waged on poverty. It is ridiculous for the government to finance a "war on poverty"[2] by taxing, inflating, and spending, and so sacrificing the savings of the masses who are trying to improve themselves through their own efforts.

This is one of the many contradictions that we have in our political, not our economic, system. To explain what I have in mind, consider the dreadful contradiction of the American government when it says: "We have to wage a war against poverty. Certainly many people are poor and we must make them wealthier." And yet this government taxes the people in order to make bread more expensive. You will say, "So, bread is more expensive; this is an exception." But it is not an exception! The American government spends also billions of tax money in order to make cotton more expensive. Cotton goods are certainly not luxury goods; they are perhaps luxury goods when compared with bread, but the government does the same thing, it follows the same policy, with bread.

The real war on poverty was the industrial revolution and the industrialization of modern factories. At the beginning of the 19th century, shoes and stockings were luxury items for most of the people of continental Europe; they were not articles of daily wear. And the condition of these people was not improved by taxing, by taking money or shoes from the rich to give to the poor. It was the shoe industry, not the riches of the government, that improved the condition of the poor, that made a revolutionary change in the peoples' condition.

A statesman may say, "If I had more money to spend I could do things that would make me very popular in my country." The government tries to make itself popular by doing these things, but the technique it uses is to spend; and then it tries to ascribe to itself the good results of an expenditure. An expenditure is not always good. Sometimes an expenditure is just buying bombs and throwing them into a foreign country.

But if the expenditure is beneficial, let us say if it makes it possible to improve some things in the country, then the statesman says, "Look, you never had such a wonderful life as you have under my regime. There are some bad people, some inflationists, some people who are profiteers, but I have nothing to do with them. This is not my fault." And so on.

Our economic situation depends largely on the relation of the government and the ruling political party or parties to the labor unions. We have "inflation," in the sense of higher prices, built into our economic system because the unions every year, every two years, or in exceptional cases every three years, ask for higher wages. The great majority of workers want continually higher wages and they assume wages can be manipulated ad libitum, at will, by the government.

The unions have the power, by using violence, with the aid of certain laws and of certain institutions in Washington, to force people to agree to their wage demands. If wages do not continue to go up, no one knows what will happen. The only possible solution to the inflation problem is an open opposition to the unions and to the idea that higher money wages are the only means for improving the condition of the masses. Union members should also realize that their conditions would improve if the money prices of the things they wanted to buy went down, even if their money wages did not rise. I do not want to say anything more about this problem except to add that the government started it when it began to increase the quantity of money by printing it.

To give an example of how inflation destroys savings, there was in a European country a poor boy educated in an asylum for orphans, very well educated because when he had finished school and his life in the orphanage he emigrated to the United States. In the course of a long life he accumulated a considerable fortune by producing and selling something that was very successful. When he died, after living 45 years in the United States, he left a considerable fortune of $2,000,000. Not everybody leaves such a fortune; this was certainly exceptional.

This man made a will according to which this $2,000,000 was to be sent back to Europe to establish another orphan asylum such as that in which this man had been educated. This was just before World War I. The money was sent back to Europe. According to the usual procedure it had to be invested in government bonds of this country, interest to be paid every year to keep up the asylum. But the war came, and the inflation. And the inflation reduced to zero this fortune of $2,000,000 invested in European marks — simply to zero.

To give another example, a German who in 1914 owned a fortune that was the equivalent of US $100,000 had left from that fortune nine years later one-half cent perhaps, something like that, or five cents — it doesn't make any difference; he had lost everything.

And there were similar experiences in the European universities. For instance, lots of foundations were set up in the course of centuries by people who wanted to make it possible for poor boys to study at the university and to achieve what they had achieved from the good education they had gotten at these universities. And what happened? In all these countries, in Germany, France, Austria, and Italy, there came great inflations. And these inflations again destroyed these investments. For whose benefit? For the benefit, of course, of the government. And what did the government do with the money? It spent it; it threw it away.

People still believe, however, that destroying the value of the monetary unit is something that does not hurt the masses. But it does hurt the masses. And it hurts them first. There is no better way to bring about a tremendous revolution than to destroy the savings of the masses that are invested in savings deposits, insurance policies, and so on.

An example of what I mean was furnished by the president of a bank in Vienna. He told me that as a young man in his 20s he had taken out a life-insurance policy much too large for his economic condition at the time. He expected that when it was paid out it would make him a well-to-do burgher. But when he reached his 60th birthday, the policy became due. The insurance, which had been a tremendous sum when he had taken it out 35 years before, was just sufficient to pay for the taxi ride back to his office after going to collect the insurance in person.

Now, what had happened? Prices went up, yet the monetary quantity of the policy remained the same. He had in fact for many, many decades made savings. For whom? For the government to spend and devastate.

If you talk about a catastrophe of money, you need not always have in mind a total breakdown of the currency system. Such a thing did occur in this country in 1781 with the so-called "continental currency." And it occurred in many other countries later, for instance, the most famous inflation, the breakdown of the German mark currency in 1923. These changes are not the same, nor to the same degree in various countries. But one should not exaggerate the difference in the effects brought about by the greater inflations as against the smaller inflations. The effects of the "smaller inflations" are also bad.

We must realize that in the market economy, in the capitalistic system, all interhuman relations that are not simply personal and intimate, all interpersonal relations, are expressed, made, counted in money terms. A change in the purchasing power of money affects everybody and not in such a way that you can say it is beneficial if the purchasing power of the money is going up or down.

All our relationships, the relations between individuals and the state, and between individuals and other individuals, are based on money. And this is true not only for the capitalistic countries. It is true for all kinds of conditions. For instance, in predominantly agricultural countries, in which the small- or medium-sized farm prevails, it is usual, necessarily usual, that at the death of the owner of such a farm, one of his children takes over the farm and the other children, the brothers and sisters inherit only a part of the farm.

The man who gets the farm has to pay to the others in the course of his life, step-by-step, the share of the inheritance that is theirs. That means that the man who inherits the farm gets no more and no less than the other members of the family. But when this is arranged by transferring the property to one heir and giving the others claims in money terms against this heir, claims to be settled in the course of the years, this means that everyday, if there is an inflation in progress, the share of the man who got the farm is increasing and the shares of the other brothers and sisters are sinking.

We have had in this country, continually now for several years, an outspoken inflationary increase in the quantity of circulating money. However, conditions are influenced by this situation. There has been a general rise in prices. You hear about it; you read about it; people compare prices and talk about it enough.

Yet I shouldn't exaggerate what has happened already to the dollar. What has happened to the dollar is still not something that makes a catastrophe unavoidable. If you were to go to certain other countries — Brazil or Argentina, for instance — you would be in a country that also has inflation, but a much bigger inflation. And if you ask a man in Brazil what he considers a stable money that does not drop in purchasing power, he would say, "The US dollar … that's wonderful!" Of course, it is when compared with his country's money.

The problem of money, the practical problem of money today in the whole world is precisely this: the governments believe that in the situation that I have pointed out before, when there is a choice between an unpopular tax and a very popular expenditure, there is a way out for them — the way toward inflation. This illustrates the problem of going away from the gold standard.

Money is the most important factor in a market economy. Money was created by the market economy, not by the government. It was a product of the fact that people substituted step-by-step a common medium of exchange for direct exchange. If the government destroys the money, it not only destroys something of extreme importance for the system — the savings people have set aside to invest and to take care of themselves in some emergency — it also destroys the very system itself. Monetary policy is the center of economic policy. So all the talk about improving conditions, about making people prosperous by credit expansion, by inflation, is futile!

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