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 6: Currency competition, inflation, Gresham’s Law and exchange rate

Peter Bernholz


In this chapter several characteristics of inflation, among them the working of Gresham’s and Thier’s Laws, which have been analysed before, will be considered together in a model trying to explain a complete cycle of inflation beginning with the introduction and ending with the demise of an inflating money in high or hyperinflation (Table 5.2). We have already studied two complete cycles, namely the events during the American Revolution and of the Ming paper money (Chapter 4). The idea of a complete cycle was first introduced by Subercaseaux (1912). In his highly interesting El Moneda Papel (pp. 279, 281) he calls the substitution of the inflating by stable money at the end of the cycle the ‘abnormal way of re-establishing the metallic money (the demonetisation of paper money)’. This is in contrast to the normal way of returning to a stable currency by changing the monetary regime through a currency reform. Four relevant stylised periods of inflation will be described in our simple model, which is related to the ‘monetary approach’ to the balance of payments and the exchange rate (see for example Frenkel and Johnson, 1976), to the theory of currency substitution (see for example Connolly, 1978 and Girton and Roper, 1981) and of competing monies (Starbatty, 1982). The four periods contain characteristics corresponding to stylised facts which have been observed in many historical cases of inflation, and most of which have been described above.

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