Rampant Inflation Destroys the Capital Markets that Sustain Economic Production; Capitalists and Businessmen Learn to Hedge for Financial Survival

The Keynesian commitment to expansionary policies is a commitment to inflation that does not promote full employment. It does not achieve the “miracle . . . of turning a stone into bread,” but generates the business cycle with periods of high unemployment. Continued application of the Keynesian recipe must finally lead to the complete breakdown of the monetary system and to mass unemployment. 

Rampant inflation destroys the capital markets that sustain economic production. The lenders, who sustain staggering losses from currency depreciation, are unable to grant new loans to finance business. Even if some loan funds should survive the destruction, lenders shy away from monetary contracts for  any length of time. Business capital, especially long-term loan capital, becomes very scarce, which causes economic stagnation and decline. To salvage their shrinking wealth, capitalists learn to hedge for financial survival; they invest in durable goods that are expected to remain unaffected by the inflation and depreciation. They buy real estate, objects of art, gold, silver, jewelry, rare books, coins, stamps, and antique grandfather clocks. Surely, this redirection of capital promotes the industries that provide the desired hedge objects. But it also causes other industries to contract. It creates employment opportunities in the former and releases labor in the latter. As the hedge industries are very capital-intensive, working with relatively little labor, and the contracting industries are rather labor-intensive, with a great number of workers, the readjustment entails rising unemployment. Of course, the readjustment process is hampered by labor union rules, generous unemployment compensation, and ample food stamps. 

Similarly, double-digit inflation causes businessmen to hedge for financial survival. They tend to invest their working capital in those real goods they know best, in inventory and capital equipment. Funds that were serving production for the market become fixed investments in durable goods that may escape the monetary depreciation. Economic output, especially for consumers, tend to decline, which raises goods prices and swells the unemployment rolls.

—Hans F. Sennholz, “The Causes of Inflation,” in Age of Inflation (Belmont, MA: Western Islands, 1979), 37.