Inflation and Injustice

More than a few places in this world people are trying to better themselves by saving money. Many people without access to formal financial services (or awareness of their benefits) are trying to amass capital by squirreling away cash. If wariness and luck prevent that money from being stolen, their nest-eggs might provide life-saving health care, seed capital for businesses, the means to move, education for children, and numerous other enhancements to poor people’s well-being. I say good for them. But there are people out there who don’t care if government policy stands in the way.

Unknown to many cash-hoarders—unsophisticated investors who should have our sympathy—official government policy in many countries is to inflate the currency. Under stable conditions, such policies might reduce the value of the existing stock of money at a rate of about 2% per year.

That is a boon to governments, of course, which are typically debtors. The policy quietly reduces real government debt by 2% annually without need of raising official taxes. And whether they spend the money themselves or infuse their banking sectors with liquidity, governments use monetary policy to curry favor with important political constituencies, thus solidifying power.

Inflation is a mixed bag for the business sector. In some ways, it can make planning more difficult—the government’s willingness and ability to maintain inflation at a constant rate is often in doubt. But inflation can also help the business sector by spurring exports. (Nevermind that it raises the cost of imports. Those costs are mostly paid in small increments by the great mass of politically disorganized consumers.)

Inflation does a wonderful favor for business owners by awarding them the gains from increased productivity at the expense of workers. As George Selgin articulated in the pages of Cato Policy Report fifteen years ago, when the costs of inputs fall, competition should ordinarily cause prices to drop. This “good” deflation would cause a worker making the same wage year over year to enjoy increased purchasing power and a better life. But inflation deals workers whose wages remain constant a continuing real pay cut. That means employers don’t have to reduce the pay of stagnant workers in a deflationary environment. Workers have to get a raise from employers to keep up or get ahead.

All of us wealthy and well-educated—we, the “upwardly mobile”—seek and get raises or change jobs often enough to keep our salaries ahead of inflation. And we know enough to invest our savings in assets that will maintain value or increase in value relative to inflationary cash.

But not everyone is in a position to do this. Whether it’s lack of knowledge or lack of access, a person starting out to accumulate wealth by saving money will climb a slope made slippery by inflation. A person who saves $10 cash per month for 10 years at 2% inflation will lose more than $110 dollars-worth of value—nearly a year’s worth of savings—over that decade. That’s when inflation is steady and low.

More than once, I’ve come across commentators who are so interested in inflation as an economic matter that the existence of people seems to have come out of the equation. There are people in the world who are trying to better themselves in the best way they know how. Inflation is making that harder for them, and that’s wrong.

If government policy were to send armed personnel into the homes of the less-well-off to seize 2% of their wealth every year, or 10% every ten years, I have little doubt that our smart, thoughtful, and considerate commentator class would object to the rank unfairness of such a policy. But their green eyeshades seem to blind them to the fact that inflation is unjust.

There are parries to this argument. Inflation is not the greatest concern of many of the world’s poorest. That’s true, but nothing about that denies the injustice of taking wealth from poor people. A more subtle argument is that there is no guarantee that money will hold value. That’s also true, but when a government says things like “full faith and credit” about the money it is debasing, we are in the realm of fraud. We could at least let our sympathies lie with the poor and under-educated people who think they can store value by holding governments’ fiercely defended “legal tender.”