Inflation: An Unworkable Fiscal Policy

This file is a single policy address/transcript: Mises’s 1951 remarks on mobilization finance, later reprinted under the title “Inflation: An Unworkable Fiscal Policy.” Its scope is narrow but forceful: wartime spending, taxation, borrowing, inflation, and price controls. The central thesis is that governments cannot finance large and continuing expenditures by “soaking the rich” or by monetary expansion; mobilization must be paid for openly through taxation and genuine public saving.

In dealing with problems concerned with the economics of mobilization, it is first of all necessary to realize that fiscal policies have reached a turning point.

Mises begins with the end of a fiscal era. Modern states, he argues, had long treated the income and wealth of the prosperous as a political reservoir for new spending. That reservoir is now exhausted, especially in Europe and increasingly in the United States. The implication is deliberately blunt:

Henceforth all government spending will have to be financed by taxing the masses.

This sets up the essay’s main conceptual contrast: taxation is politically painful but economically honest; inflation is politically convenient but economically destructive. Mises denies that inflation is a viable alternative to taxation, except as a short-lived expedient dependent on public misunderstanding.

What makes it possible for a government to increase its funds by inflation is the ignorance of the public.

The famous “housewife” example gives the argument its behavioral mechanism. Inflation works temporarily only while people expect prices to fall and therefore hold money. Once they grasp that government policy is systematically depreciating money, their demand for cash collapses.

If the housewife who needs a new frying pan reasons: “Now prices are too high; I will postpone the purchase until they drop again,” inflation can still fulfill its fiscal purpose.

The turning point comes when expectations reverse:

Then she reasons: "I do not need a new frying pan today; I shall only need one next year. But I had better buy it now because next year the price will be much higher."

For Mises, this is not a secondary psychological detail but the point at which inflation ceases to serve even its fiscal purpose. The “flight into real values” marks the breakdown of confidence in the monetary unit. Hence his conclusion is categorical:

Inflation can never be an instrument of fiscal policy over a long period of time.

The middle sections apply this reasoning to war finance. Mobilization means redirecting real goods from civilian consumption to military use; money finance cannot conjure these goods into existence. Mises’s image of the hidden soldier at the breakfast table dramatizes war as a claim on everyone’s real consumption.

At the breakfast table of every citizen in wartime sits an invisible guest, as it were, a GI who shares his meal.

The correct fiscal method, then, is not obscured monetary manipulation but taxation, supplemented by genuine borrowing from people’s savings.

The adequate method of providing the funds the government needs for war is, of course, taxation.

Mises’s political argument is as important as his monetary one. Inflation lets rulers conceal costs and redirect popular anger toward merchants, “profiteers,” or business. In that sense, it is not democratic generosity but fiscal evasion.

But the truth is that inflation is a typically antidemocratic measure.

The later sections sharpen the policy implications. If more revenue is needed, lower-income brackets must also be taxed, not because taxation should “hurt,” but because the required sums cannot be obtained from the rich alone. Borrowing is legitimate when it draws on saved resources; borrowing from commercial banks is merely money creation under another name.

The final conceptual move is semantic. Mises insists that “inflation” properly names the cause—expansion of money and credit—not the later rise in prices. Confusing the two leaves policy aimed at symptoms rather than causes.

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check.

From this definition follows his rejection of price controls. Controls cannot defeat the consequences of monetary expansion; they only mask them, distort markets, and invite coercion. The source of inflation is not vague “pressure” but policy.

It is the government that makes our inflation.

The work’s relevance lies in this fusion of fiscal realism, monetary theory, and democratic accountability. Mises treats inflation as hidden taxation, price control as concealment, and honest public finance as the necessary condition of responsible government.