Inflation
The consequences of inflation are pretty well the reverse of those produced by deflation. When prices rise, business men enjoy windfall profit through the appreciation in the market value of their assets. The business outlook tends to appear hopeful so that business men generally are anxious to enlarge their plant capacity. Employment and production tend to rise. (Unless of course they are already as high as can be.) Debtors gain relief because of the fall in the real value of their debts and their interest obligations. Their gain is the creditors’ loss.
The decline in the purchasing power of money imposes losses on people who hold their wealth in the form of cash or fixed value securities. Persons on fixed incomes, such as pensioners and the recipients of insurance benefits, suffer a decline in real income. If it becomes perpetual or severe, inflation may produce a general disruption of the economic system. If the purchasing power of money falls steadily, lenders are likely to insist on inordinately high rates of interest, to compensate for the prospective decline in the real value of the of the sums which they will receive each year as interest, and the prospective decline in the real value of the principal when it is repaid. If the purchasing power of money falls very rapidly, people may refuse altogether to accept it in payment for goods or services. They know that when they come to spend the money offered to them, it will be worth less than it is currently worth. In such cases money can no longer perform its role as medium of exchange; transactions must be carried out on the clumsy and wasteful basis of barter.
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