Author: Henry Hazlitt
_Henry Hazlitt_
Reading time: 19 minutes
Synopsis
What You Should Know About Inflation (1968, new edition 2017) explains how inflation starts. It shows why it eats up savings and income. It also covers its bad effects on society. You will learn how to protect yourself from inflation. And you will find out what needs to happen in politics to stop it.
What’s in it for you: Understand how inflation works.
Imagine you go to the same market every Saturday for years. You always buy the same things: bread, cheese, fruit. Your routine stays the same. You pay with the same money each time. But one thing quietly changes: Your basket gets a little emptier each week. No one took your money. Yet, it does not buy as much as before.
This feeling of getting less for your money is real. It is not the fault of a greedy shopkeeper. It is also not the farmer randomly raising prices. Instead, an unseen process causes this: inflation. It decides what your money will be worth tomorrow.
In this “Blink” (summary), we explain how inflation starts. We show why it affects everyone. This includes people who save money and business owners. Most importantly, we show you how to protect yourself. This is true for individuals and for society.
Blink 1 – A small but important difference: Inflation means money loses value, not just rising prices.
When you hear “inflation” in the news, it is almost always about prices going up. Your weekly shopping costs more. Fuel prices rise. Rents increase. This makes it sound like inflation just means higher prices. But this is not the full picture.
In truth, inflation means money loses its value. Ten years ago, 100 Euros could buy a full shopping cart. Today, the same amount buys only half a cart. The goods did not get “more expensive” by themselves. Instead, your buying power has decreased. This is what inflation truly is: a process where each unit of money is worth less and less.
History shows how serious this can be. Look at Germany in the early 1920s. The government printed more and more paper money. It needed to pay war repairs after World War I. At first, people only saw prices slowly rise. But soon, the process became wild.
A loaf of bread cost 250 Marks in January 1923. By November, it cost 200 billion Marks. People got their daily wages in the evening. They quickly ran to the market. Their money would be worth less in just a few hours. Many carried their pay in baskets or wheelbarrows. This was not because they were rich. It was because the money was almost worthless. Children made kites from banknotes. The paper was worth more than the number printed on it.
Today, we do not need wheelbarrows for our money. But inflation is still real. When money slowly loses value, shopkeepers and landlords raise their prices. They do this to make up for the loss. You only notice the higher prices. But behind this is money losing its value. Your salary stays the same, but you can buy less. This is because the base of the economy, the value of money itself, becomes weaker.
So, inflation is not just numbers in reports. It directly affects your daily life. It affects your savings and your future plans. That is why it is key to not only link inflation with “high prices.” You must see it for what it truly is: a slow theft of your money’s buying power.
Blink 2 – Money without value: Inflation happens when more money is created from nothing.
To understand where inflation starts, do not just look at prices in the supermarket. Instead, think of all the money in a country like a big cake. This cake has a total value. This value comes from the goods and services made.
Here is the key point: If more money is put into circulation, the cake grows. This sounds good at first. But you do not automatically get a bigger piece of the cake. In fact, your piece becomes much smaller compared to the whole cake. This is the real cause of inflation. Each banknote loses value because the total amount of money increases.
We already mentioned the 1920s as an extreme case. Germany printed huge amounts of money to pay war debts. This made its own currency lose value. Today, this happens in a much softer way. It often happens through government money choices.
Governments often spend more money than they get from taxes. To fill this gap, they borrow money. In the past, they would ask private investors. Today, the central bank steps in. It buys government bonds. These are IOUs from the state. It pays for them not with existing money, but with freshly created money. So, extra money enters circulation almost out of nothing.
Here is an example: A government wants to build highways for ten billion Euros. Tax money is not enough. So, the government issues bonds for that amount. Private investors might buy some. The central bank buys the rest. This money is not “earned.” It is created electronically. On paper, it looks like the government has new funds. But in truth, it reduces the buying power of all citizens.
But central banks are not the only ones causing inflation. The banking system also plays a part. If you deposit 1000 Euros into your account, the money does not just stay there. The bank can lend most of it out. It might lend 900 Euros to someone who wants to buy a car. The car dealer then puts this money into their bank. That bank, in turn, lends out most of it. So, the first 1000 Euros slowly become many times more “book money” in circulation. This system is called fractional reserve banking. It makes the money supply grow without printing new money. This extra money exists only on paper. But it has real effects on our buying power.
So, inflation does not happen by chance. It is the result of clear choices. These choices put more money into circulation than there is real value made. This happens through central banks, government spending, or giving out loans. The pattern is always the same: Money grows faster than the goods you can buy with it. So, money slowly loses its value.
Blink 3 – One person’s joy, another’s sorrow: Inflation does not affect everyone in the same way.
Inflation works like an unseen way to move money around. It takes from savers and lenders. It gives to people who owe money and to the government.
If you have saved money (in a savings account, life insurance, or private pension), your wealth relies on money keeping its value. Inflation eats away at this base. Insurance and pension funds invest money for a long time, often in bonds. But when money’s buying power falls, these investments lose real value. This means your pension, which you trusted for decades, might not be enough later. It might not let you keep the same living standard.
Lenders (people who have lent money) are in the same situation. Imagine you lend someone 10,000 Euros. They will pay it back in five years. Due to inflation, this money loses buying power over those five years. In the end, you get your 10,000 Euros back. But you can buy much less with it. So, your real wealth has shrunk, even if the number stays the same.
People who owe money (debtors) benefit from inflation. If you take out a loan today, for example for a house, you will pay it back in the future with money that is worth less. A loan of 200,000 Euros will feel like a much smaller amount after some years of inflation.
The government also benefits from inflation as a borrower. It can borrow large amounts of money. It uses this to pay for things beyond tax income. Examples are pensions, public worker salaries, or big building projects. Of course, it must pay back these debts with interest later. But if inflation rises, the debt truly loses weight.
Let’s say the government takes out a loan of one billion Euros today. If inflation is five percent each year, this billion will only have the buying power of about 600 million Euros in ten years. On paper, the government pays back its billion Euros. But in reality, it gives back only part of the original value. So, it gets rid of its debts “cheaper” in real terms than without inflation.
For regular citizens, inflation also has a mental effect in daily life. It changes how we behave. If you know your money will be worth less tomorrow, your desire to save changes. Instead of saving, you would rather spend the money right away. So, inflation works in two ways. It lowers the real value of your wealth. And it makes saving seem bad. In both cases, you, as a careful and hardworking citizen, lose out.
But for the government, more spending is good. It boosts the economy. We also talked about cheaper government debts. And there are more reasons why the government does not mind some inflation.
Blink 4 – Risky game: How the government uses inflation as a tool.
For the government, inflation is more than just a side effect. It also acts as a “hidden tax.” Unlike other taxes, there are no open decisions or debates in parliament. Yet, everyone pays it.
We already mentioned the reason indirectly: Inflation comes with rising prices. A loaf of bread that costs 3 Euros today might cost you 3.15 Euros next year. This is the government’s advantage. Higher prices mean higher value-added tax (VAT)! 19 percent of 3 Euros is 57 cents. 19 percent of 3.15 Euros is almost 60 cents. So, the government automatically gets more money without raising the tax rate.
The same thing happens with wages. If your salary increases because of inflation (not because you are more productive, but because everything is more expensive), you might move into a higher tax bracket. On paper, you earn more. But in reality, your buying power has stayed the same or even dropped. This gives you no benefit. But the government gets extra income. That is why this is also called a hidden tax.
Another point is that politicians often think only about the next election. They do not think about the next decades. Inflation comes in handy here. It frees up money quickly. With newly created money, governments can start projects right away. They can increase social benefits or lower taxes. This brings votes. People are happy to get more money in the short term. They only feel the real costs later. This is when prices rise and the seeming benefit disappears. This is because the extra money is not new wealth. It only reduces the existing buying power.
All of this risks losing trust in the government in the long run. Money is more than just paper or numbers in an account. It is a promise that you will get a similar value for it tomorrow. If this is not true, people will move their money. To save their money, people put it into real estate or stocks. The more people do this, the more prices rise in these areas. This has bad results. Investments that were once stable suddenly become too expensive. Houses become so costly that rents explode. Young families cannot afford a home anymore.
The economy also feels the effects of these money movements. Not enough capital flows into useful investments. Instead of building new factories or funding new ideas, more and more money goes into risky investments. This slows down economic growth in the long run. And the gap between rich and poor grows wider.
So, the government might benefit from inflation in the short term. But in the long term, it harms the financial stability that a healthy society needs.
Blink 5 – From real assets to the gold standard: How we protect ourselves from inflation – as individuals and as a society.
You might think inflation is like a natural force you cannot escape. But there are ways to protect yourself. And politics also has ways to stop money from losing value.
The first protection for you as a person is education. If you understand how inflation works, you make better choices. If you know that 10,000 Euros in your account will likely be worth much less in ten years, you can plan early. You can look for other options. This way, you avoid bad surprises.
One big mistake, still common, is to simply leave your money in a savings account or hide it as cash. Inflation cruelly eats away at its buying power there. It’s better to change some of your money into real assets. These include property, precious metals, or shares in companies. They have the benefit of representing real value. This could be a house, a piece of land, or a part of a business. If things go well, they can even grow in value instead of being lost to inflation.
However, there’s a problem: For you as an individual, it might be smart to keep your money safe. But if millions of people do the same thing at once, new problems arise. Property prices jump up. Stock markets get too hot. Gold becomes too expensive due to speculation. What means protection for one person can become a dangerous bubble for society. The sad part is: This new risk comes exactly because everyone tries to save themselves.
So, politics needs to act. Its main way to help is to stop the money supply from growing too much. As long as central banks create new money that is not backed by real economic value, inflation will keep happening. A good plan would be to control money policy. This means no fake low interest rates. No endless buying of bonds. No funding government spending by printing money. Instead, money should be made scarce and reliable again.
In the past, many countries used the gold standard. This meant that every banknote was backed by a fixed amount of gold. Because of this, money could not be created without limit. And trust in the currency was high. But governments had less freedom during crises. So, the gold standard was finally ended. But bringing it back would offer good protection against inflation.
Besides this, what applies to every household also applies to politics: The government should learn to spend money more carefully. It should not spend more than it gets from taxes. The less it borrows, the less tempting it will be to just “melt away” these debts later with inflation.
Conclusion
Inflation is not a natural event. People cause it. It happens when more money is in circulation. But the real value in the economy does not grow. This leads to a slow loss of buying power. Your savings shrink. People who owe money and the government benefit.
Politics uses inflation to collect hidden taxes. This might offer short-term benefits. These include more investments and, most importantly, more votes. But in the long run, it harms the stability of a whole society.
To stop inflation, we need careful money policies. We need strong government budgets. And we need to clearly limit how much money is created. But you can also protect yourself from inflation. For example, rely less on cash or bank accounts. Instead, put your money into lasting values, like property or gold.
Source: https://www.blinkist.com/https://www.blinkist.com/de/books/was-sie-uber-inflation-wissen-sollten-de