Monetary Regimes and Inflation

Monetary Regimes and Inflation

History, Economic and Political Relationships

Peter Bernholz

This book explores the characteristics of inflations, comparing historical cases from Roman times up to the modern day. High and moderate inflations caused by the inflationary bias of political systems and economic relationships – and the importance of different monetary regimes in containing them – are analysed.

Chapter 7: Ending Mild or Moderate Inflations

Peter Bernholz

Subjects: economics and finance, financial economics and regulation


In this chapter we will try to answer the question how mild or moderate inflations can be ended, whereas in the next chapter the same question will be asked for high and hyperinflations. This separation into two chapters already suggests that the tasks to end these two types of inflation call for different answers (Ireland 1997, with comments by Blanchard 1997, and Sargent 1997). This is indeed the case. The reason lies in the fact that during high and hyperinflations the real stock of the national money has been strongly diminished, whereas this is not true for mild and moderate inflations, in which the real stock of money rises often even above the normal non-inflationary level. The effort, in many cases undertaken by monetary and fiscal authorities, sometimes with the support of international organisations, to end high inflations with the recipes adequate for moderate inflations has led several times to catastrophic consequences. We will return to this problem in the next chapter. 7.1 CONDITIONS FAVOURING THE STABILISATION OF MODERATE INFLATION In Chapter 2 the inflationary bias of governments was analysed and historically documented. This led to the conclusion, supported by empirical evidence for different monetary regimes, that only monetary constitutions binding the hands of government can prevent or contain inflation over extended periods. The idea that sound monetary constitutions are necessary to limit the inflationary tendencies of unfettered government dates back to at least 1800, and has been favoured by economists like Jevons (1900, pp. 229–32) in England and...

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