Monetary Regimes and Inflation

Monetary Regimes and Inflation

History, Economic and Political Relationships, Second Edition

Peter Bernholz

Exploring the characteristics of inflations and comparing historical cases from Roman times up to the modern day, this book provides an in depth discussion of the subject. It analyses the high and moderate inflations caused by the inflationary bias of political systems and economic relationships, as well as the importance of different monetary regimes in containing them. The differences for the possible size of inflations among monetary regimes like metallic currencies, the gold standard and fiat paper money are discussed. It is shown that huge budget deficits of government have been responsible for all hyperinflations. This revised second edition debates whether a growth of the money supply exceeding that of real Gross Domestic Production is a necessary or sufficient reason for inflation and also includes a new concluding chapter, which explores the long-term tendencies to create, maintain and abolish inflation-stable monetary regimes. Moreover, the conditions for long-term inflation-stable monetary regimes in history are explored.

Chapter 1: Introduction

Peter Bernholz

Subjects: economics and finance, financial economics and regulation

Extract

Inflation presupposes the existence of money, which evolved as an unplanned social institution by a number of inventions and innovations during a period of perhaps 2500 years. It was fully developed with the introduction of coins in Lydia and Ionia about 630 BC, and in China at about the same time. It follows that inflation cannot be older than money. But it seems that especially rulers soon detected the potential to increase their revenues by tampering with its value. Already in antiquity we know of many cases of lowering the intrinsic metallic value of coins for this purpose. Examples are the minting of bad coins by Athens during the Peloponnesian War (Aristophanes, The Frogs, 719–37) or by Rome during the Second Punic War, especially from 217 BC (Heichelheim 1955, p. 503). The damage and suffering caused by inflation during the course of history are enormous. Still, the worst excesses of inflation occurred only in the 20th century. This development was a consequence of the further technical development of money from coins to paper money and book money together with changes in the monetary regime or constitution ruling supply and control of money. The use of the word inflation for an expansion of the money supply or an increase in prices, quite in contrast to the first occurrences of inflation as historical events, is of rather recent origin.