Monetary Regimes and Inflation
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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.
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Chapter 2: Inflation and monetary regimes

Peter Bernholz


Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. (Milton Friedman, 1970, p. 24) It is one of the main purposes of this book to show that inflations are indeed monetary phenomena. But in which sense is Friedman’s statement true? First it has to be asked: Why and under which conditions does a ‘more rapid increase in the quantity of money than in output’ come about? This question can be answered easily. For the stock of money can only rise strongly if the money-creating agencies are technically and institutionally enabled to do so (see Sections 2.2 to 2.6). The second question asks: About which kind of money we are speaking? And third, it has to be clarified whether the increase of the money supply as envisioned by Friedman is only a necessary or also a sufficient condition for future inflation. As to the necessary condition, the empirical evidence presented in this book will make absolutely clear that a sufficiently rising money supply is necessary to create inflation. But is it also a sufficient condition to do so? Is it not possible that no inflation may occur in spite of a strongly increasing money supply? Let us begin to analyse these problems by turning to the second question. Historically, very different objects have served as money.

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