So inflation turns out to be merely one more example of our central lesson. It may indeed bring benefits for a short time to favored groups, but only at the expense of others. And in the long run it brings ruinous consequences to the whole community. Even a relatively mild inflation distorts the structure of production. It leads to the overexpansion of some industries at the expense of others. This involves a misapplication and waste of capital. When the inflation collapses, or is brought to a halt, the misdirected capital investment—whether in the form of machines, factories or office buildings—cannot yield an adequate return and loses the greater part of its value.
Nor is it possible to bring inflation to a smooth and gentle stop, and so avert a subsequent depression. It is not even possible to halt an inflation once embarked upon, at some preconceived point, or when prices have achieved a previously agreed upon level; for both political and economic forces will have got out of hand. You cannot make an argument for a 25 percent advance in prices by inflation without someone’s contending that the argument is twice as good for an advance of 50 percent, and someone else’s adding that it is four times as good for an advance of 100 percent. The political pressure groups that have benefited from the inflation will insist upon its continuance.
It is impossible, moreover, to control the value of money under inflation. For, as we have seen, the causation is never a merely mechanical one. You cannot, for example, say in advance that a 100 percent increase in the quantity of money will mean a 50 percent fall in the value of the monetary unit. The value of money, as we have seen, depends upon the subjective valuations of the people who hold it. And those valuations do not depend solely on the quantity of it that each person holds. They depend also on the quality of the money. In wartime the value of a nation’s monetary unit, not on the gold standard, will rise on the foreign exchanges with victory and fall with defeat, regardless of changes in its quantity. The present valuation will often depend upon what people expect the future quantity of money to be. And, as with commodities on the speculative exchanges, each person’s valuation of money is affected not only by what he thinks its value is but by what he thinks is going to be eveiybody else’s valuation of money.
All this explains why, when hyperinflation has once set in, the value of the monetary unit drops at a far faster rate than the quantity of money either is or can be increased. When this stage is reached, the disaster is nearly complete; and the scheme is bankrupt.