...Such changes of prices, either inflationary or
deflationary, have been major forces in history for the last six
centuries at least.
Over that long period, their power to modify men's lives and
human history has been increasing. This has been reflected in two
ways.
On the one hand, rises
in prices have generally encouraged increased economic activity,
especially the production of goods, while, on the
other hand, price changes have served to redistribute wealth within
the economic system.
Inflation, especially a slow steady rise in prices, encourages
producers, because it means that they can commit themselves to
costs of production on one price level and then, later, offer the
finished product for sale at a somewhat higher price level. This
situation encourages production because it gives confidence of an
almost certain profit margin.
On the other hand, production is discouraged in a period
of falling prices, unless the producer is in the very
unusual situation where his costs are falling more rapidly than the
prices of his product...
...Rising prices benefit
debtors and injure creditors, while falling prices do the
opposite. A debtor called upon to pay a debt at a
time when prices are higher than when he contracted the debt must
yield up less goods and services than he obtained at the earlier
date, on a lower price level when he borrowed the money.
A creditor, such as a bank, which has lent money—equivalent to a
certain quantity of goods and services—on one price level, gets
back the same amount of money—but a smaller quantity of goods and
services—when repayment comes at a higher price level, because the
money repaid is then less valuable.
This is why bankers, as creditors in money terms, have been
obsessed with maintaining the value of money, although the reason
they have traditionally given for this obsession—that "sound money"
maintains "business confidence"—has been propagandist rather than
accurate...
...Another paradox of banking
practice arose from the fact that bankers, who loved
deflation, often acted in an inflationary
fashion from their eagerness to lend money at interest. Since they
make money out of loans, they are eager to increase the amounts of
bank credit on loan....
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