Inflation leads to the business cycle, without a doubt.  However, it can do something much more sinister, completely obliterate the currency.  The business cycle will be set into motion, but continued inflation will lead to a currency breakdown.  The purchasing power will continue to fall until the point it’s worthless, and no longer acceptable as a medium of exchange.  Inflation can be beneficial in the short run, but not in the long run.

Purchases are made to get rid of the notes on hand.  The notes will be used to purchase something that will do a better job of holding its value.  People will buy unnecessary commodities if they expect the inflation will not come to an end.  The increase in purchases will give the appearance of a healthy economy, but this is just the crack up boom.  This is certainly not a healthy and sustainable economy.

People will expect to lose if they continue to hold on to the notes.  The future prospect of these notes are bleak.  They lose their value everyday.  The money you have in your bank account for unanticipated future events can no longer satisfy those future events.  The demand for cash holding falls.  Purchases are made frantically.  It must be stressed, the anticipation of inflation can cause this.

The interest rates will rise.  The creditor will charge a higher interest rate if he expects inflation.  He will be paid back less than what he lent if he doesn’t.  The creditor must take inflation into consideration.  The money paid back will have less purchasing power than the money lent.  Money now is worth more than money later.  Given the truth of this statement, there will always be interest.  However, inflation makes the rates higher.

The masses will separate entirely from these notes.  After they have bought what they can, the notes will no longer be acceptable for exchange.  The money lender doesn’t expect to make a profit.  Something with an enduring worth will be chosen.  Something the state can’t print at will.  This can either happen slowly or suddenly.  Slowly would be a step-by-step process.  Suddenly can happen within a single day.

Reference

Ludwig von Mises; On the Manipulation of Money and Credit