The Cause and Perils of Inflation

(This essay appears in the Fall 2004 Mackinac Center newsletter "Impact.")

Some 25 years ago, well past the age of 80, Henry Hazlitt set about to compose a book on inflation. A succession of American presidents in the 1970s appeared at a loss to understand, much less remedy, an ongoing collapse of the worldwide monetary system. Though Hazlitt was not trained as an economist, there were few authors more qualified from a lifetime’s work — journalist, literary critic, economic scholar and philosopher — to produce the timely and prescient volume "The Inflation Crisis and How To Resolve It."

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Hazlitt’s experience as an analyst of inflation was intensive and decades-old. At the end of World War II, he had been an editorial writer at the New York Times for 12 years when his opposition to the 1944 Bretton Woods international monetary agreements caused an irreparable strain in his relationship with the paper’s management. He eventually refused to write anything further on the subject, saying, "It’s an inflationist scheme that will end badly, and I can’t support it."

As a capstone to the work of the Mackinac Center’s summer interns, Board of Directors Member James Rodney suggested that they read Hazlitt’s book and write analytical and interpretive essays on it. These young staff members didn’t personally live through the severe dislocations caused by the extreme inflation of the 1970s, but it’s clear they have developed through reading Hazlitt’s book a deep understanding of inflation’s causes and its destructive effects. Excerpts from the essays illustrate three of the most important general lessons on inflation:

1. Economists often provide faulty definitions of inflation, with an undue emphasis on rising prices. Hazlitt focuses on currency expansion and its consequences.

"According to Hazlitt, inflation is actually the degradation in the value of the currency."

— Richard Scherf, Central Michigan University

"The ideal stable unit of currency has neither physical utility itself nor fluctuations in value. Money with these features would make it a neutral commodity with a set value, favoring neither borrowers nor lenders, rich nor poor, governments nor citizens.

— James Hohman, Northwood University

2. Inflation’s impacts are not simply economic, but inevitably political, social and moral.

"Inflation calls to mind images of a wheelbarrow of cash being used to buy a loaf of bread, images of a life’s savings being wiped out in an afternoon. In reality, however, the effects of inflation are much more mundane, insidious and difficult to detect. Though commonly accounted for in our private financial practices, slower rates of inflation still possess great power for social and financial ill.

— Nathan Russell, Hillsdale College

Inflation is popularly viewed as a natural occurrence, not to be feared, and perhaps even, to a certain extent, desirable. People have grown accustomed to a gradual inflation and forgotten its effects in the 1970s. Hazlitt, however, recalls for everyone that inflation is not natural or desirable, and that the system that enables inflation should be dismantled and replaced.

— Laura Davis, University of Michigan

3. The solutions for inflation involve an increase in personal liberty and a reduction in the power of the state.

Hazlitt offers possible solutions through the demonopolization of money by the government and the possibility of offering privately created currencies.

— Bryan Dahl, Michigan State University

The government also limits liberty by not allowing free individuals in a free market to establish their own mediums of exchange. The federal government monopolizes the minting of money and prevents, by law, people from contracting and dealing in currency of their own choosing.

— Laura Davis, University of Michigan

Legal tender laws mean you have to use money of the state, and this money is usually emitted by a central bank, or government itself. … Repealing the legal tender laws would allow free competition among currency issuers.

— Ondrej Hartman, University of Economics (Czech Republic)

Hazlitt’s observations on personal freedom are timeless, and his conclusions about inflation have contributed enormously to the field of monetary economics. They are ideas that are too often absent today in college curricula. The Mackinac Center for Public Policy is pleased to have provided this summer’s class of interns with both policy research experience and the chance to review this important work of free-market literature.


Chris Bachelder is director of communications at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

In this essay, Communications Director Chris Bachelder provides a sampling of reviews by Mackinac Center summer interns of “The Inflation Crisis and How To Resolve It,” a book by free-market journalist Henry Hazlitt.

Although the book was first published in 1978, its insights remain relevant today.