Chapter IV

WITH THESE STATEMENTS WE could close our analysis. We have seen that deflation is not inherently bad, and that it is therefore far from being obvious that a wise monetary policy should seek to prevent it, or dampen its effects, at any price. Deflation creates a great number of losers, and many of these losers are perfectly innocent people who have just not been wise enough to anticipate the event. But deflation also creates many winners, and it also punishes many “political entrepreneurs” who had thrived on their intimate connections to those who control the production of fiat money.

Deflation is certainly not some sort of a reversal of a previous inflation that repairs the harm done in prior redistributions. It brings about a new round of redistribution that adds to the previous round of inflation-induced redistribution.¹⁸ But it would be an error to infer from this fact that a deflation following a foregoing inflation was somehow harmful from an economic point, because it would involve additional redistributions. The point is that any monetary policy has redistributive effects. In particular, once a deflation of the supply of money substitutes sets in, the only way to combat this is through inflation of the supply of base money, and this policy too involves redistribution and thus creates winners and losers.

It follows that there is no economic rationale for monetary policy to take up an ardent fight against deflation, rather than letting deflation run its course. Either policy does not benefit the nation as a whole, but merely benefits a part of the nation at the expense of other groups. No civil servant can loyally serve all of his fellow-citizens through a hard-nosed stance against deflation. And neither can he invoke the authority of economic science to buttress such a policy.

But there is also another point of view that merits consideration and which is in fact decisive for our problem. It results from the fact that, in practice, there are at any point in time two, and only two, fundamental options for monetary policy. The first option is to increase the quantity of paper money. The second option is not to increase the paper money supply. Now the question is how well each of these options harmonizes with the basic principles on which a free society is built.

¹⁸See Mises, Theory of Money and Credit, pp. 262f.; idem, Human Action, p. 414.