1. It is widely known, that inflation is dangerous, but the amount of damage it causes is usually underestimated. Forced inflation breaks the rules of society. It has always at least the three following consequences:
- it benefits its creator at the expense of all users of money
- it allows a greater proliferation of debts
- it lowers the purchasing power of money
But there is more.
2. The inflation benefits the state on the expense of its population, but also to the detriment of lower levels of government. In 17th and 18th century, the European kings have suppressed important centers of of intermediary and alternative power. The democratic nation states have completed the centralization. Inflation was its economic driving force; thus, as Hülsmann says, aided at least indirectly nationalist movements and their worship of the state.
Inflation supports the growth of the centralized state, and allows it monopolize more functions than under a natural production of money. This increases the influence on its citizens and weakens other groups, like families. But moral principles like subsidiarity (that problems should be solved on the lowest level possible) are hard to combine with such a powerful (and hidden) phenomenon.
3. Paper money makes it possible to prolong war. People grow eventually tired of war and will try to resist further expenses of the state of it. The state can simply print the money and ignore the will of its citizens. This was reported to be the case in both World Wars, prolonged by months, if not years.
If everything is allowed in war (and e.g. the just war theory says otherwise), one should note there are others, less dangerous means to gather funds available as well.
Some might say, that a state is better informed about the war than the citizens. But isn't exactly that the role of political leaders, to inspire and inform the citizenry?
4. The printing of money allows the state to act without support from the population, or against their will. A government taking the property of its citizens arbitrarily is called a tyranny.
5. Forced inflation inflation is inherently unstable because it turns moral hazard and irresponsibility into an institution. The slow decline creates a certain "race to the bottom" in financial institutions and leads to repeated economical crises.
6. Forced inflation makes credit cheaper, than it would be in a free market. With it, businesses can finance projects with credit to a larger degree instead of paying it out of their own money or not starting them at all.
Banks would be mere financial middlemen, lending out money of its savers (pooling resources, so to speak). They couldn't lend money under conditions much different from those given to their own lenders. For a bank to stay profitable in a free market, it would have to stay within narrow boundaries, determined by savers.
But Fractional Reserve Banks can do better. They can easily produce more money substitutes and give credit at better rates. The same is true with paper money, their producer can lend money at zero or even negative rates (like the Bank of Japan in recent years).
Few businesses can afford to resist such offers due to competition and mere survival instinct. They become more dependent on banks. Banks become de facto owners of many businesses and there are fewer true entrepreneurs.
Because credit produced by forced inflation is easily gained, it leads the economical decision makers to irresponsibility, a risk especially for large concerns with easy access to capital markets. While sometimes confused for innovativeness, real innovations have a tendency to upset the banks' investments, notes Hülsmann, and they will tend to resist them or want to make sure the companies they are invested in get the innovations as well. Thus are businesses made more conservative - and the existing ones protected from newcomers.
(One needs not to point out, that there is also innovation stemming from this carelessness, as evidenced by many innovative 'financial instruments' of recent years. These days, they are known as toxic assets.)
7. But people get cheap credit, too. It is not only easier to get into debts, the constantly rising prices make them downright attractive. To hoard cash, like it was safe to do in the old times, is counterproductive. It can be more rational to take on debt and buy something that will see its value rise with inflation. Beyond that, everybody has to invest their money into financial markets, to avoid its constantly sinking of value. Banks, stockbrokers, bond dealers and others profit nicely from the situation. They are not directly guilts of usury, points out Hülsmann, since it is institutionalized.
And in this way, people are driven into debt by the monetary policy of their own states. This is not compatible with financial independence and it undermines independence in other areas as well. To quote:
The debt-ridden individual eventually adopts the habit of turning to others for help, rather than maturing into an economic and moral anchor of his family, and of his wider community. Wishful thinking and submissiveness replace soberness and independent judgment. And what about the many cases in which families can no longer shoulder the debt load? Then the result is either despair or, alternatively, scorn for all standards of financial sanity.
Inflation is sometimes defended as the means to "jumpstart the economy" and give businesses the means to invest. But hoarding does not endanger anyone's investments (see Chapter 4.). Inflation doesn't create new resources, it merely shifts existing resources from businesses financed by own money, to those running on credit.
8. To protect their savings, people need solid financial understanding, time and luck. Lucking any of those, losing a large part of their property is very likely. The old might lose their life's savings and despair. The young will throw many of the old principles completely away.
Inflation forces people to think more about money and let it influence their decisions more, to earn more money, but often on the cost of their personal happiness. It makes society more materialistic, if you will. The temptation of money increases even more.
The constantly rising prices lowers the quality of products and services in some sectors of economy. With the principal lie of fractional reserve banking, the habit of lying seems to spread throughout society.
9. Forced inflation enabled the growth of a welfare state, and grow it did. A welfare state weakens the institution of the family and the moral principles it imparts.
It crowds out the services supplied by a family and charitable institutions, not by virtue of providing them in a better way, but by being financed by tax money and inflation, thus taking away resources applicable to other uses. It is inefficient economically and unable to provide emotional and spiritual support (Hülsmann quotes the pope John Paul II to the effect).
A welfare state allows a greater proliferation of 'alternative lifestyles', and socializes the costs of careless behavior, making it easier to live without moral guidelines.
To Hülsmann, a welfare state is not evil per se. But the forced inflation allows its uncontrolled growth and the mentioned destructive tendencies.
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