Inflation

INFLATION. - By monetary i[nflation] is meant the increase in the quantity of money in circulation beyond what is the market's need for means of payment. Under the gold monetary regime, i[nflation] is always preceded by the declaration of forced legal tender, by which the convertibility of banknotes into gold is suspended. However, the establishment of forced legal tender does not always and necessarily lead to i[nflation]; after the collapse of the gold system, free convertibility into gold ceased to exist for all the world's currencies, but in very many countries control over the issuance of paper money prevented the emergence of inflationary phenomena. In general, the excessive and continued expansion of monetary circulation that gives rise to i[nflation] is brought about above all by the necessity of public finance to meet unavoidable and far-reaching needs, as is usually the case with the financing of war and of post-war reconstruction, when those needs cannot be met by the normal sources of revenue represented by recourse to loans and by tax receipts; in this case nothing remains for the State but to press the bank of issue to create the additional mass of banknotes needed for payments by state bodies.

The consequences of i[nflation] are of various kinds: the most immediate and significant is that of the depreciation of the monetary unit, which corresponds to and is measured by the rise in the prices of goods and services. In fact, according to the equation of exchange (v. MONETA), the level of prices in a country proves to be directly proportional to the quantity of money in circulation. The velocity of circulation of the means of payment also contributes to determining the price level, and in a period of i[nflation] it too tends to increase, thereby accentuating the degree of depreciation of the money. The effects of the rise in prices, in which every inflationary process is summed up, are of enormous economic and social importance. This importance derives from the fact that not all individual prices, nor even all categories of prices, undergo a rise of equal magnitude. If, indeed, the rise were uniform and developed simultaneously for all goods, all services and all personal incomes, there would be nothing but a simple nominal change in the monetary expression of the various economic magnitudes, without any negative or positive consequence.

The promptness with which, on the one hand, certain prices and certain incomes rise creates large windfall profits for some categories of economic agents, while, on the other hand, the delay with which a certain group of prices and incomes adjusts to the depreciation of the money is reflected in substantial losses and in a lowering of the standard of living for the majority of economic agents. In general it is the so-called active classes of the population, industrialists and merchants above all, that reap the bulk of the profits deriving from i[nflation]; in its more advanced phases, however, the gains tend instead to shift toward the category of speculators, which grows in number and in power. The classes that instead bear the negative consequences of i[nflation] are those of the recipients of fixed incomes and of wage and salary earners, whose remuneration displays a typical stickiness to prompt and adequate adjustments.

To the extent that it redounds to the advantage of the active classes, i[nflation] presents some favorable aspects, given that the members of those classes are led to increase production in order to increase their gains. Nevertheless the negative aspects are by far predominant: the differing dynamics of incomes bring about drastic shifts of wealth from one category to another, often creating social inequalities; in general individual savings end up being pulverized, with consequences that for the mass of small savers can be truly tragic; the productive apparatus tends in the long run to disintegrate; in many sectors, and especially in the commercial and banking ones, phenomena of hypertrophy occur; all the functional correlations of the economic system undergo distortions and shifts that are reflected in the future as well. In a word, i[nflation], when it reaches certain proportions, is one of the most harmful phenomena that a social community can encounter.

Ercole Calcaterra