Henry Hazlitt (1894 -1993) was a brilliant supporter of free market economics. He wrote many books and was a regular columnist for the Wall Street Journal, The Nation, New York Times and Newsweek (before the latter two went to the far left). He was, according to Lew Rockwell, the most important public intellectual within the Austrian School of Economics.
You’ve probably heard similar facts before but Mr. Hazlitt writes so beautifully it is worth your review. We’ve excerpted these paragraphs from his books, Economics in One Lesson and The Inflation Crisis. Mr. Hazlitt demolished the arguments for government spending and the modern welfare state.
“Chronic excessive government spending and chronic huge deficits are twin evils. The deficits lead more directly to inflation. But the total spending is the greater evil because it is the chief political cause of the deficits. If the spending were more moderate, the taxes to pay for it would not have to be so oppressive, so damaging to incentive, so destructive of employment and production. The primary evil is the exorbitant spending of the leviathan Welfare State. If spending were brought within reasonable bounds, taxes to pay for it would not have to be so burdensome and demoralizing, and politicians could be counted on to keep the budget balanced.”
Mr. Hazlitt explained how this would lead to inflation. “It is next to impossible to avoid inflation with a continuing heavy deficit. That deficit is almost certain to be financed by inflationary means – i.e., by directly or indirectly printing more money. Huge government expenditures are not in themselves inflationary – provided they are made wholly out of tax receipts, or out of borrowing paid for wholly out of real savings. But the difficulties in either of these methods of payment, once expenditures have passed a certain point, are so great that there is almost inevitably a resort to the printing press.”
He further noted, “When the Federal Reserve banks buy government notes or bonds in the open market, they pay for them, directly or indirectly, by creating money. This is what is known as ‘monetizing’ the public debt. Inflation goes on as long as this goes on.”
Mr. Hazlitt warned, “Inflation itself is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay…it might be thought of as equivalent to a flat tax of the same percentage, without exemptions, on everyone’s income. It is a tax not only on every individual’s expenditures, but on his savings account and life insurance. It is, in fact, a flat capital levy, without exemptions, in which the poor man pays as high a percentage as the rich man…Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.”
He concluded, “A period of inflation is almost inevitably also a period when demagogy and an anti-business mentality are rampant. If implacable enemies of the country had deliberately set out to undermine and destroy the incentives of the middle classes to work and save, they could hardly have contrived a more effective set of weapons than the present combination of inflation, subsidies, handouts, and confiscatory taxes that our own politicians have imposed upon us.”
Mr. Hazlitt noted, “For the first time in the history of the world, practically every country is on a paper-money basis and every country is inflating.”
The possibility of hyperinflation was one of Mr. Hazlitt’s concerns. He wrote, “In the late stages of hyperinflation, prices start to soar far faster than the supply of money is increased and even far faster than it can be increased. Nearly everybody is convinced that the inflation is going to go on, that the printing of paper money will be more and more accelerated, that prices will rise at a faster and faster rate. They want to exchange their money for anything they can get. Finally, however, holders of goods refuse to accept that money on any terms.”
Mr. Hazlitt continued, “In sum, the belief that the creation and management of a monetary system ought to be the prerogative of the State – that is, of the politicians in power – is not only false but harmful. For the real solution is just the opposite. It is to get government, as far as possible, out of the monetary sphere.”
Finally, he delivered the ultimate lesson; “As long as we retain our nearly omnipotent redistribute State, no sound currency will be possible.”