Inflation and the Business Cycle

The business cycle, which Marx maintained is inherent in capitalism, is actually caused by government inflation. “New money is issued by the banking system, under the aegis of government,” says Dr. Murray Rothbard, “and loaned to business. To businessmen, the new funds seem to be genuine investments. But these do not, like free market investments, arise from voluntary savings. The new money is invested by businessmen in various projects, and paid out to workers and other factors as higher wages and prices. As the new money filters down to the whole economy, the people tend to reestablish their old voluntary consumption/savings proportions. In short, if people wish to save and invest about 20% of their income and consume the rest, new bank money loaned to business at first makes the saving proportion look higher. When the new money seeps down to the public, it reestablishes its old 20-80 proportion, and many investments are now revealed to be wasteful. Inflationary credit distorted the market, and misled the businessmen. Liquidation of the wasteful investments of the inflationary boom constitutes the depression phase of the business cycle.”

Expansion of the money supply also temporarily lowers interest rates, which creates malinvestment as well.

Interventionist economists carelessly criticize the spreading of economic growth throughout a free-market society as the “trickle-down theory.” But inflation, by trickling, then rushing, through society, spreads economic misery among the poor, working, and middle classes, while enriching the special interests. It is this “trickling-down” that deserves condemnation from everyone concerned about poverty.

“An increase in the money supply confers no social benefits whatsoever,” says Dr. Hans Sennholz. “It merely redistributes income and wealth, disrupts and misguides economic production, and as such constitutes a powerful weapon in a conflict society.”

Whoever gets the new money first benefits the most. But the favored industry becomes dependent on new injections of government credit, and therefore forms a powerful special interest lobby to argue its viewpoint in Washington. Thus does inflation encourage the breakdown of society into warring factions.