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 4: Moderate paper money inflations

Peter Bernholz


Paper money was probably first introduced in Europe in Sweden during the 17th century in the form of banknotes (Deutsche Bundesbank 1971). Many banks (like the Bank of England, founded in 1694) and governments soon followed this example during the 18th century. Consequently, there existed during the following two centuries usually two kinds of paper money, namely banknotes and government-issued paper money notes. When they were first put into circulation, all these notes were convertible at a fixed exchange rate of one to one into copper (Sweden), silver or gold coins with full intrinsic value. But in the course of the following decades, more and more countries abolished convertibility, beginning with the paper money experiment undertaken by John Law in the beginning of the 18th century with the co-operation of the regent, the Duke of Orleans, when the French Crown was facing bankruptcy because of the massive spending by Louis XIV on wars and luxury expenditures. As a consequence a moderate inflation and a return to a pure metallic standard followed after a few years (Hamilton 1936/37, Luethy 1959). Sweden followed with inconvertibility of its banknotes, moderate inflation and stabilisation in the mid-century (see below). Finally at the end of the century most European countries, including England, were on a discretionary paper money standard, mainly but not only because of the wars related to the French Revolution and the imperialistic policy of Napoleon (Buesch 1800).

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