Sunday, January 29, 2012

Quote of the Week

...from The Economic Consequences of the Peace by John Maynard Keynes:
“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

In this book Keynes discusses likely consequences of the peace treaty signed after World War I. Keynes shows remarkable foresight in recognizing that the burden of restitution placed on Germany and Austria-Hungary was so great that it would lead to further war in the future. There are many timely concepts within this book which are important for a peaceful resolution to the current European crisis. The passage above, however, is interesting given the recurring requests in the US for the Federal Reserve to implement higher inflation targets.

Although many people today may be quick to write off any ideas stemming from Lenin, this description of inflation is particularly telling and was accepted by Keynes. As I noted in Higher Inflation Displays Bad Economics, “it should be apparent that inflation encourages the accumulation of debt and benefits those possessing and producing goods.” A policy of higher inflation may therefore exacerbate the current wealth disparity that many proponents of this policy consistently argue against. Frédéric Bastiat, in Essays on Political Economy, observed that inflation is a policy for which the “immediate consequence is favourable, [but] the ultimate consequences are fatal.” Problems with the US economy clearly still exist, but I remain convinced that Inflation is NOT the Answer.

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