Ludwig von Mises
Reprinted from Christian Economics, October 18, 1960.
Socialism, Inflation, and
the Thrifty Householder
The most serious dangers for American freedom and the American way of life do not come from without. They are not of a military character. Neither will socialism conquer this country?and, for that matter, the civilized nations of Western Europe?in the shape of an open surrender to the program of the Communist International. Whatever chances socialism may have in the United States are due to the economic policies of our own political parties that gradually undermine the economic and social foundations of American freedom and prosperity.
Both traditional parties, the Republicans as well as the Democrats, are sincere in protesting their abhorrence of totalitarianism. The voters in casting their ballots for either of these parties are fully convinced that they are voting for officeholders who are firmly committed to the preservation intact of the Constitution and all the freedoms it grants to the individual citizens. These politicians and their supporters would be seriously alarmed if they realized that they are virtually paving the way for a system that does not differ essentially from the totalitarian system they decidedly reject.
Socialism and Planning Not Different from Communism
The fundamental fallacy that leads contemporary political thinking astray is to be seen in the fictitious distinction between communism on the one side and socialism and planning on the other side.
The two terms socialism and communism are synonyms. Communism is a very old term, while the term socialism was first coined in France at the end of the 1830s. Up to the year 1917 both were used indiscriminately. Thus Marx and Engels called the program they published in 1848 the Communist Manifesto, while the parties they organized for the realization of this program called themselves socialist parties.
Before 1917 no distinction was made between the two words. When Lenin called his party "communist," he meant that it was a party sincerely aiming at the realization of socialism as distinct from the parties that, according to Lenin, merely called themselves socialist parties while in fact they were "social traitors" and "servants" of the bourgeoisie. Lenin never pretended that his Communist party had any other goal than the realization of socialism. The official name he gave to his government was?and is?the Union of the Soviet Socialist Republics. If somebody says he is opposed to communism, but cherishes socialism, he is no more consistent or logical than a man who declares that he is opposed to murder but cherishes assassination.
The essential feature of the socialist, or communist conduct of affairs is the substitution of the government's unique plan for the plans of individual citizens. "Planning" is therefore nothing but one term more to signify what the terms socialism and communism are designed to signify.
Yet many leaders of our political parties are deluded by the idea that socialism and planning are something different from communism and that in fostering these schemes they are opposing communism, while in fact they are fully adopting the Communist program. Of course, these confused politicians pretend that what they are aiming at is a socialist system that preserves democracy and representative government. They say they want to abolish "only" economic freedom and to retain political freedom. They are at a loss to realize that economic control is not merely control of one sector of human life which can he separated from other sectors. If the government controls all material factors of production, it controls all aspects of the individuals' activities. If it controls all publishing facilities, all printing presses, radio, television, and all assembly halls, every political activity depends on the discretion of the authorities. If everybody is bound to work according to the orders of the government, only those whom the rulers trust are free to devote their time and their efforts to public affairs. It is not an accident that representative government and civil liberties developed step by step with the substitution of capitalism for feudalism and disappeared everywhere as soon as socialism?whether the "right" model (German Nazism and Italian Fascism) or the "left" model (Russian Bolshevism)?supplanted the market economy. Despotism is the necessary political corollary of socialism just as representative government is the necessary constitutional corollary of capitalism.
Unwitting Support of Socialism by Inflationary Policies
Certainly there are many among the "left" wing leaders of both political parties who are consciously intent upon abolishing any trace of freedom and converting America into a full replica of the Soviet system. But most of our politicians and the rank and file of the voters are not guilty of such a betrayal. On the contrary, they are anxious to preserve the traditional system of government, the free institutions, established by the founding fathers, the institutions that were the foundations of this country's greatness, glory and prosperity, as they were the essential features of the civilization of Western Europe. But even these sincere advocates of liberty are, unbeknown to themselves, undermining the "American way of life." They are lending a helping hand to allegedly beneficial economic policies that, on the one side, sabotage the operation of the market economy and, on the other side, restrict the individuals' self-determination by expanding the field of government control, euphemistically called "social" control.
The most detrimental of all varieties of economic policies is inflation, i.e., the policy of increasing the supply of money and money substitutes. If additional legal-tender banknotes are issued or if additional bank balances subject to check (checkbook money) are created, nothing is added to the material wealth of a country. But those persons into whose pockets these newly created means of payment are flowing are thereby in a position to expand their purchases. Thus an additional demand for commodities and services comes into being while the supply of such commodities and services has not been increased. The inevitable outcome is a tendency for prices to soar.
There is no need to depict in detail the unwelcome, nay the catastrophic effects of such a state of affairs. Everybody is familiar with them; everybody knows how he was hurt by them. Among reasonable men there is hardly anybody who would dare to advocate openly a policy of inflation. Nonetheless this country, and most other countries of the world, have for many decades been committed to inflationist measures.
The fault rests with a lack of responsibility and a fickleness of character on the part of statesmen and politicians as well as with the greed of powerful pressure groups who want to get handouts from the government, the notorious "something for nothing." A government cannot spend but at the expense of the people. As taxes have already long since overstepped the optimum of returns and there is hardly any sizeable increase to be expected from further raising the already levied taxes or devising new ones, the main way to finance additional government spending is with inflation.
It is a serious error to assume that a nation can win and can become richer by increasing the supply of money and money substitutes. What one group of people may gain, is lost by other groups.
Inflation and the Creditors
Let us look upon one important aspect of the problem, the nexus of creditor and debtor. One of inflation's main effects is the progressive dilution of debts. The more inflation progresses, the more is the debtor favored at the expense of the creditor. While the nominal value of a loan remains unchanged, its purchasing power shrinks more and more. Of course, some people believe that this is after all not too bad, or that it may even be desirable. The creditors, they think, are rich and will get over such losses. But the debtors are poor and will be benefited by a reduction in the burden of their debt.
Yet, this way of reasoning is entirely fallacious. It is based upon a fateful misconstruction of essential features of the capitalistic system, under which a continually increasing multitude of people with moderate means are becoming creditors.
One of the main achievements of the capitalistic system is to be seen in the opportunity it offers to the masses of citizens to save and thereby to improve their material well-being.
In the "good old days," effectual saving was possible only for the well-to-do. The farmer, the artisan and the owner of urban real estate could fructify their thrift into improvement of their own farms, shops and buildings. But the landless worker had only one method of saving, to hoard by burying a few coins or hiding them in some other way. This was a very unsatisfactory method of saving. Its main deficiency was that it did not bear any interest and did not give the saver an opportunity to acquire a share of the material factors of production. While new capital stock was added to the already previously available equipment, while new houses and workshops were built and were better equipped, the manual worker saw no way to contribute to this effort, nor to participate directly in its fruits. In this sense, he could feel that he was a "proletarian," a man who did not own any property and who was forever destined to live from hand to mouth.
The financial techniques of capitalism radically altered this state of affairs. Capitalism not only increased the marginal productivity of labor spectacularly and thereby raised wage rates and the employees' standard of living. It also made it possible for thrifty laborers to join in the endeavors of accumulating capital. It inaugurated institutions to fructify everybody's parsimony, first of all savings banks and insurance organizations. Even the smallest savings deposit bears interest. The success of these schemes was overwhelming. Billions were added to the capital working in the plants, farms, mines and transportation facilities. A continually growing part of the nation's wealth is the counterpart of these holdings of the common man.
The Common Man a Creditor
These conditions manifest themselves in the fact that the average man is today a creditor rather than a debtor. The much talked-about rise in consumers' credit lending, originating from installment selling and buying must not deceive us. In the balance the common man is by far a creditor, not a debtor. The billions of dollars that big business and real estate owe to mortgage banks, commercial banks, savings banks, and insurance companies belong?virtually, although not formally?to the common man. He owns corporate bonds as well as bonds issued by the U.S. Treasury and by various subdivisions of the government. And finally familiarity with these types of investment provides him with a better understanding of the ways and practices of business and thus enables him also to venture on the acquisition of common stock. One of the most characteristic developments of present-day finance, the mutual funds and kindred schemes, shows the extent to which what is called risk capital also turns into a popular way of saving and investing.
Yet, however momentous these attempts to make the common man an owner of common stock may be, the main method of making employees, in their capacity as capitalists, participate in the well-being created by the free economy is by the acquisition of titles and claims payable in definite amounts of the nation's monetary unit. From this point too the masses acquire a lively interest in the stability of the nation's legal tender, for the value of all kinds of deposits, bonds and insurance policies is inseparably linked to the purchasing power of the dollar. A policy of "creeping inflation" such as this country has now pursued for a long series of years?apart from all the other detrimental effects it produces?is in the strict meaning of the words antisocial and antidemocratic. It is a policy against the vital material interests of the common man. It hurts seriously those judicious and conscientious earners of wages and salaries who are intent upon improving their own and their families' lot by thrift.
Under a sound money policy these people would become more and more deproletarianized. They would acquire a continually rising share in the nation's wealth and become interested in the nation's economic effort, not only as employees, but also as owners of interest-bearing investments. But under inflationary policies they see how the purchasing power of their savings, their insurance policies and their pensions is persistently dwindling. Their hopes for steady material improvement are dispelled. Their attempts to join those strata of the population who, by saving and capital accumulation are cooperating in the improvement of economic conditions, are thwarted. They become desperate and lose their confidence in the fairness and efficiency of the market economy.
The Communists Favor Inflation
The Communist chiefs know very well how their cause is furthered by undermining the purchasing power of the dollar. They know they cannot succeed in a country in which the masses of the wage earners rely upon their savings and upon other income such as pensions and social security benefits determined in fixed amounts of the nation's legal tender. The main obstacle which their propaganda encounters in this country is the fact that the "common man" is more and more deproletarianized and sees his personal economic condition improved, not only by rising wages and salaries, but also by his claims to pensions and interest from savings. The 65 percent of the American population who hold life insurance policies are proof against the venom of the Communist slogans and so are the 47 percent of the entire population who are time depositors in mutual savings and commercial banks. But when these people see the value of their thrift continually diminished by inflation, they lose their faith in the system and become an easy prey to the mendacious incitation of the subversive parties.
It is a really diabolic makeshift to egg various pressure groups on to ask for more and more government spending to be financed by credit expansion. The bill for such government extravagance is always footed by the most industrious and provident people. It is their claims that are shrinking with the dollar's purchasing power.
A sound monetary policy is one of the foremost means to thwart the insidious schemes of communism.