Keynes on the Ravages of Inflation

John Maynard Keynes was a member of the British delegation to the peace negotiations at Versailles after World War I. He was disgusted by the Allies’ vindictive, grasping, and short-sighted actions at the conference, and he dashed off a book to denounce those actions and to explain why he thought the treaty would give rise to a plethora of troubles, as indeed it did. His book, The Economic Consequences of the Peace (1919), is still well worth reading today for its vivid character sketches, its recitation of key facts, and its penetrating political and economic insights.

Along the way, Keynes digressed to discuss why the European governments’ inflation of their money stocks during and after the war portended grave consequences. Although Keynes is not ordinarily cited as a strong anti-inflationist—indeed in important ways, his later views helped to create a well-nigh inevitably inflationary system of government macroeconomic interventionism—I know of no stronger statement against inflation than the one he expressed on pp. 235-36 of his book. It reads as follows:

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. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

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.”