Aspects of the Pathology of Money by Michael A. Heilperin

Author:Michael A. Heilperin [Michael A. Heilperin]
Language: eng
Format: epub
ISBN: 978-1-6101-6299-9
Publisher: Ludwig von Mises Institute
Published: 1968-11-06T16:00:00+00:00

Liquidation

The net result of inflation is twofold: (1) a change in income distribution and in the structure of prices (we shall disregard this aspect in the present discussion); (2) the building up of excessive productive equipment. This implies that the process of readjustment must consist in the provision of a waiting period, during which the progress of economic growth will make an excessive plant ‘normally’ necessary, and during which some of the plant will become obsolete and thus destroyed. From the point of view of capital-goods industries, it is important that the process of obsolescence should take place; for pending such obsolescence, there will be but a limited new demand for capital goods. A post-inflation economy resembles a child which has received, besides the suits of clothing he immediately needs, some that are too large. If a waiting period is granted, the too-large suits will fit him in due time. But some may never be worn because their shape becomes unfashionable, while the cloth of which others are made will not keep in good condition long enough. The economic system comprises, however, not only the child, but also the tailor—and it is to the interest of the tailor that new suits should be ordered both next year and the year after.

Pending the material readjustment which would absorb into the ‘normal’ economic process a part of the excessive equipment, and destroy another part by making it obsolete, it is most important that production be continued on the highest possible level. In order to realize this result, the capital invested in the excessive equipment must be written down to as near zero as possible. Should it not be so written down, overhead costs for the output of the previously existing plant will be increased by the interest charge on the additional equipment, and thus the price–cost structure will be disturbed over a longer period.1

Thus, the financial liquidation of inflation consists in writing down industrial debt and industrial capitalization to what corresponds to their real earning capacity.1 This means a loss of capital to some owners, of course. But such loss is merely the acknowledgment of a previous bad investment.

An economic system may be inflated financially over long periods of time, if the accumulation of debt exceeds the earning capacity of the indebted plant. If such accumulation goes on long enough, the ultimate result is an exaggeration of costs of production and a disturbance in the cost–price structure which leads to more or less considerable difficulties. It may be said that inflation, as defined in this study, creates such an overindebtedness,2 but there are other ways in which over-indebtedness (or overcapitalization) may arise.3 The readjustment of it is very clearly an important element in the liquidation.

We shall later note some at least of the practical aspects of liquidation. Here it is sufficient to say in conclusion that liquidation is the proper cure for an inflated economy. Let us now turn to reflation, the proposed corrective of deflation.

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