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Monetary Regimes and Inflation: History, Economic and Political Relationships
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. Peter Bernholz demonstrates that certain macroeconomic traits have been stable characteristics of inflations over the centuries, and illustrates their causes; the development of real stock of money, real exchange rate, real budget deficit and of currency substitution. He goes on to explain that metallic monetary regimes allow substantial inflations by debasement - 4th century Roman Empire experiencing the highest of them - but are dwarfed by the experience of hyperinflations. These occurred only under discretionary paper money regimes. To demonstrate this and their characteristics, all twenty-nine hyperinflations are studied. In contrast to the existing literature, the book also examines political conditions that allow a return to stable monetary regimes, given the inflationary tendencies of political systems. Finally, economic measures and institutional reforms to end high and moderate inflations are discussed. To enliven reading, experiences of contemporary observers like Hemingway and Stefan Zweig, who did not have any knowledge of the economics of inflation, have been inserted. Consequently their evidence is often more convincing than any econometric analysis. Formal mathematical analysis has been kept to a minimum. Exceptions for providing a deeper understanding can be left out without losing the thread of the argument. Monetary Regimes and Inflation will appeal to a wide audience including students, economists, historians, political scientists and sociologists. The book will also be warmly welcomed by bankers, businessmen and politicians facing, and perhaps attempting to solve, the problems of inflation.
224 pages, Hardcover
First published January 1, 2003
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Displaying 1 - 7 of 7 reviews
April 11, 2014
A very impressive book incredibly packed with data and research. At times there's so much data in there that it becomes harder to read for enjoyment as it feels almost as hard as research academic papers, but for that I respect it all the more in this age where so many books are so very soft on logic and on data and fill their pages more with anecdotes than content. Not this book though! So much data, every statement inspected from different angles with great logical rigor applied to a multitude of historical data, always testing hypotheses against data and logic. A lot of respect for this book.
The tiny minus might be that because of the subject it studies, comparing the cases in which a hyperinflation could be stopped and those in which the governments that started it or even new ones had limited success, it made me wonder at times if it's not an advice book to the rulers instead of a warning tale to the peoples. But even so I must respect great and rigorous work and the peoples who will take the time to research and understand even a part of this information I believe will have great benefits, and the author deserves great praise for the extensive knowledge he dug up in this field so jealously guarded by the rulers of lands in the last century, the century when most almost all inflations in history happened (yes, it's a bit funny to consider that great inflations in centuries past might have gone as high as "3-4% and cause great unrest while those figures are today normal (especially in real terms) even in the most advanced countries).
One thought that crossed my mind from the book's learnings was that it seems that the inflation tax is in a way a constant supplementary tax, but at the same time it's an optional tax, in the sense that over the ages it offered a way out for those who took the time to learn about it. Which reminds me of some interesting observations from the book when it was comparing monetary reforms that worked with those that didn't and it observed very interestingly that sometimes methods that should have worked didn't because the governments had already wasted so much of the peoples' confidence that even the right steps weren't believed and those cases where the people were naive enough to believe (and thus lose more) into steps which were neither good nor credible. No wonder governments put such a high price on "confidence"... either for use or abuse.
I also find it again interesting how complex subjects like this can also be very easily understood when one returns to a more daily levels and thinks instead of countries of individual people, relatives or friends and sees all the steps mirrored, with some taking some choices, others others, others making credible promises others not, some keeping their words others not... and in all cases the prices those who judge wrongly pay.
The tiny minus might be that because of the subject it studies, comparing the cases in which a hyperinflation could be stopped and those in which the governments that started it or even new ones had limited success, it made me wonder at times if it's not an advice book to the rulers instead of a warning tale to the peoples. But even so I must respect great and rigorous work and the peoples who will take the time to research and understand even a part of this information I believe will have great benefits, and the author deserves great praise for the extensive knowledge he dug up in this field so jealously guarded by the rulers of lands in the last century, the century when most almost all inflations in history happened (yes, it's a bit funny to consider that great inflations in centuries past might have gone as high as "3-4% and cause great unrest while those figures are today normal (especially in real terms) even in the most advanced countries).
One thought that crossed my mind from the book's learnings was that it seems that the inflation tax is in a way a constant supplementary tax, but at the same time it's an optional tax, in the sense that over the ages it offered a way out for those who took the time to learn about it. Which reminds me of some interesting observations from the book when it was comparing monetary reforms that worked with those that didn't and it observed very interestingly that sometimes methods that should have worked didn't because the governments had already wasted so much of the peoples' confidence that even the right steps weren't believed and those cases where the people were naive enough to believe (and thus lose more) into steps which were neither good nor credible. No wonder governments put such a high price on "confidence"... either for use or abuse.
I also find it again interesting how complex subjects like this can also be very easily understood when one returns to a more daily levels and thinks instead of countries of individual people, relatives or friends and sees all the steps mirrored, with some taking some choices, others others, others making credible promises others not, some keeping their words others not... and in all cases the prices those who judge wrongly pay.
February 1, 2021
The book examines the causes and process of inflation, and in particular hyperinflation. Its conclusions provide a good counter to the policy ideas that are emerging from the growing popularity of MMT.
The inflationary tendency of a currency depends on the monetary system. here are three possible monetary systems:
Metallic standard When the currency is tied to the value of metals and banknotes are fully convertible. Anyone can melt down and mint new currency and this keeps the value in check. It also creates fixed exchange rates between different currencies.
Weak metallic standard The currency notes are partially convertible, such as the Bretton Woods system after World War 2. Only central banks could exchange dollars into gold. All countries were on a paper standard with a fixed exchange rate to the US dollar. This ended in 1971.
Discretionary paper standard Here the currency cannot be converted into anything. There can either be a fixed or floating exchange rate system, with differing implications for monetary policy.
The inflationary tendencies of monetary systems are created by politicians. The only way to prevent it is to bind the hands of politicians. Metallic standards are the least inflationary, or have experienced the lowest inflations, followed by systems centered on independent central banks.
Hyperinflations have only occured after 1914, except for the French Revolution (which saw the introduction of the assignat). There were some other cases of high inflations such as the american war of independence, and the American Civil War. Both of these were based on a paper money standard. There was also the case of the roman currency debasement in the fourth century, and the recurring inflations of successive chinese dynasties which started by issuing banknotes and ended with inflation because they issued currency to finance deficits.
His main thesis is that high inflations are caused by budget deficits financed through money creation. He is not completely rigid on this point and also admits that high inflations make budget deficits worse. It cannot be said for certain that one causes the other. Especially since one of the episodes of hyperinflation (Yugoslavia) did not have a budget deficit.
He describes the process through which high inflation happens and also creates a model for it. One of my criticisms of the book is that the ideas are not laid out in an order or structure that makes it easy to consume. I have modified his model and description for my own sake here, and some of these periods overlap:
Paper money is first introduced and preferred by people because it is easier to use. It reduces the friction and transaction costs of an economy.
Governments take on debt to support the economy. With time, the interest on debt consumes a higher share of revenue and leads to higher rates in markets, and even crowds out other investments. The government becomes tempted to finance the debt with new money. This prevents higher rates in the short term, and creates positive effects. But over the long term it creates inflation. Almost all episodes of hyperinflation are associated with budget deficits, with some rare exceptions.
The currency being depreciated or debased drives good money out of circulation. Here good money is either metallic currency or foreign currency or a currency of the same country but with different parity/rules/laws. Through this period there is a loss of official reserves.
At this stage the existing parity or fixed exchange rates have to be broken.
Government goes through great lengths to maintain the use of the currency and to prevent people from protecting themselves from inflation or from bypassing the use of the depreciating currency
People start to use foreign currency or hard money for transactions, and the good money drives out the bad money. The hyperinflation also makes the political conditions for monetary reform possible which would introduce good money. For monetary reform to be successful the public needs confidence in the currency and for government finances to be in order.
Some of the conditions leading up to past periods of hyperinflations could just as well have been describing what we are seeing today. This section in particular stood out:
it has still to be explained why the money supply rises more than the productive potential of a country…As has been argued, the party in power may introduce an expansionary policy to stimulate the economy and to lower unemployment exactly in time to increase their chances of winning the next election…Given a supply shock, the government may be tempted to increase the money supply to counter some of the negative consequences. Though it cannot reach this goal in the end, at least the situation may be better at election time, since the rise of price level follows only later…
We this have to ask ourselves, which political forces are powerful enough to increase a budget deficit to such a level that money creation seems to be necessary to finance it, and this in such a magnitude that high and hyperinflation result? Historically, three different chains of causation seem to have led to such developments…A second possibility is a strong push, for instance if a new populist government speedily increases minimum wages or all wages by a high percentage and similarly public spending. In most such cases, moreover, controls setting maximum prices are introduced by governments…
It Should already be obvious that such policies could and can only be introduced in already weak or weakening political systems, in which parties or rulers are in desperate need to use extreme measures to gain or maintain popularity or power, in which knowledge of existing economic realities is very weak or non-existent , or in which utopian ideologies are believed and win the upper hand.
There were many voices calling for hyperinflation in the aftermath of the GFC, who turned out to be incredibly wrong. One of the problems is probably not differentiating between types of money (reserves vs spendable cash). I find it incredibly ironic that the risk of hyperinflation is laughed at now, even though the political, monetary and economic conditions are eerily similar to previous episodes. Not only are we laughing in the face of this risk, we are constructing an entire policy around the denial of its causes.
I am going to continue researching past periods of hyperinflation and its causes to get a better understanding and intuition for the process. Ultimately its important for me to estimate how likely it is that this could happen and, if it does, what to do about it. The next book in that respect will be Hyperinflation - A World History by He Liping.
The inflationary tendency of a currency depends on the monetary system. here are three possible monetary systems:
Metallic standard When the currency is tied to the value of metals and banknotes are fully convertible. Anyone can melt down and mint new currency and this keeps the value in check. It also creates fixed exchange rates between different currencies.
Weak metallic standard The currency notes are partially convertible, such as the Bretton Woods system after World War 2. Only central banks could exchange dollars into gold. All countries were on a paper standard with a fixed exchange rate to the US dollar. This ended in 1971.
Discretionary paper standard Here the currency cannot be converted into anything. There can either be a fixed or floating exchange rate system, with differing implications for monetary policy.
The inflationary tendencies of monetary systems are created by politicians. The only way to prevent it is to bind the hands of politicians. Metallic standards are the least inflationary, or have experienced the lowest inflations, followed by systems centered on independent central banks.
Hyperinflations have only occured after 1914, except for the French Revolution (which saw the introduction of the assignat). There were some other cases of high inflations such as the american war of independence, and the American Civil War. Both of these were based on a paper money standard. There was also the case of the roman currency debasement in the fourth century, and the recurring inflations of successive chinese dynasties which started by issuing banknotes and ended with inflation because they issued currency to finance deficits.
His main thesis is that high inflations are caused by budget deficits financed through money creation. He is not completely rigid on this point and also admits that high inflations make budget deficits worse. It cannot be said for certain that one causes the other. Especially since one of the episodes of hyperinflation (Yugoslavia) did not have a budget deficit.
He describes the process through which high inflation happens and also creates a model for it. One of my criticisms of the book is that the ideas are not laid out in an order or structure that makes it easy to consume. I have modified his model and description for my own sake here, and some of these periods overlap:
Paper money is first introduced and preferred by people because it is easier to use. It reduces the friction and transaction costs of an economy.
Governments take on debt to support the economy. With time, the interest on debt consumes a higher share of revenue and leads to higher rates in markets, and even crowds out other investments. The government becomes tempted to finance the debt with new money. This prevents higher rates in the short term, and creates positive effects. But over the long term it creates inflation. Almost all episodes of hyperinflation are associated with budget deficits, with some rare exceptions.
The currency being depreciated or debased drives good money out of circulation. Here good money is either metallic currency or foreign currency or a currency of the same country but with different parity/rules/laws. Through this period there is a loss of official reserves.
At this stage the existing parity or fixed exchange rates have to be broken.
Government goes through great lengths to maintain the use of the currency and to prevent people from protecting themselves from inflation or from bypassing the use of the depreciating currency
People start to use foreign currency or hard money for transactions, and the good money drives out the bad money. The hyperinflation also makes the political conditions for monetary reform possible which would introduce good money. For monetary reform to be successful the public needs confidence in the currency and for government finances to be in order.
Some of the conditions leading up to past periods of hyperinflations could just as well have been describing what we are seeing today. This section in particular stood out:
it has still to be explained why the money supply rises more than the productive potential of a country…As has been argued, the party in power may introduce an expansionary policy to stimulate the economy and to lower unemployment exactly in time to increase their chances of winning the next election…Given a supply shock, the government may be tempted to increase the money supply to counter some of the negative consequences. Though it cannot reach this goal in the end, at least the situation may be better at election time, since the rise of price level follows only later…
We this have to ask ourselves, which political forces are powerful enough to increase a budget deficit to such a level that money creation seems to be necessary to finance it, and this in such a magnitude that high and hyperinflation result? Historically, three different chains of causation seem to have led to such developments…A second possibility is a strong push, for instance if a new populist government speedily increases minimum wages or all wages by a high percentage and similarly public spending. In most such cases, moreover, controls setting maximum prices are introduced by governments…
It Should already be obvious that such policies could and can only be introduced in already weak or weakening political systems, in which parties or rulers are in desperate need to use extreme measures to gain or maintain popularity or power, in which knowledge of existing economic realities is very weak or non-existent , or in which utopian ideologies are believed and win the upper hand.
There were many voices calling for hyperinflation in the aftermath of the GFC, who turned out to be incredibly wrong. One of the problems is probably not differentiating between types of money (reserves vs spendable cash). I find it incredibly ironic that the risk of hyperinflation is laughed at now, even though the political, monetary and economic conditions are eerily similar to previous episodes. Not only are we laughing in the face of this risk, we are constructing an entire policy around the denial of its causes.
I am going to continue researching past periods of hyperinflation and its causes to get a better understanding and intuition for the process. Ultimately its important for me to estimate how likely it is that this could happen and, if it does, what to do about it. The next book in that respect will be Hyperinflation - A World History by He Liping.
October 14, 2013
A reasonably good look at the monetary inflations of history and how they ended. I appreciated the careful look at the data and the conclusion points at the end of each chapter. I wish that the author had written a general conclusion chapter to tie together everything. (Note: I skipped the mathematical model sections)
June 18, 2023
Ambitious in scope and packed with research, but comes up short in user-friendliness due to an overly academic style and the author not taking the next steps in synthesizing useful implications for readers
August 29, 2019
Reads like a white paper, because it is. Interesting tidbits, though. Better used as a reference rather than a leisure read.
April 11, 2020
Bernholz published this in 2003 when he was Professor Emeritus of Economics at the WWZ, university of Basle. He describes a number of historical cases studies catalogued under different monetary regimes (commodity money, indexed currency boards, paper money - with different currency regimes) and constructs a stylised model of how hyperinflation occurs and how it is brought to a halt.
It seemed an appropriate time to re-read this, having first been introduced to it by a friend a decade ago. It can be instructive - and enjoyed - by those who are averse to formulas by skipping all but the conclusions of Chapter 6; like economists used to do, Bernholz takes the trouble to explain the implications and assumptions in words!
It seemed an appropriate time to re-read this, having first been introduced to it by a friend a decade ago. It can be instructive - and enjoyed - by those who are averse to formulas by skipping all but the conclusions of Chapter 6; like economists used to do, Bernholz takes the trouble to explain the implications and assumptions in words!
Want to read
October 4, 2011Reviewed by Economic History
Displaying 1 - 7 of 7 reviews