Monetary Regimes and Inflation: History, Economic and Political Relationships

225 Pages·2003·5.49 MB·English

by  Peter Bernholz

Monetary Regimes and Inflation

Monetary Regimes
and Inflation
History, Economic and Political Relationships
Peter Bemholz
ProfessorEmeritus ofEconomics, Centrefor Economics and
Business (WWZ) University ofBasIe, Switzerland
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© PeterBernholz2003
Allrightsreserved.Nopartofthispublicationmaybereproduced,storedin
aretrievalsystemortransmittedinanyformorbyanymeans,electronic,
mechanicalorphotocopying,recording,orotherwisewithouttheprior
permissionofthepublisher.
Publishedby
EdwardElgarPublishingLimited
TheLypiatts
15LansdownRoad
Cheltenham
GlosGL502JA
UK
EdwardElgarPublishing,Inc.
WilliamPrattHouse
9DeweyCourt
Northampton
Massachusetts01060
USA
Thisbookhasbeenprintedondemandtokeepthetitleinprint.
Acataloguerecordforthisbook
isavailablefromtheBritishLibrary
LibraryofCongressCataloguinginPublicationData
Bernholz,Peter.
Monetaryregimesandinflation: history,economicandpoliticalrelationshipsiby
PeterBernholz.
p.cm.
1.Inflation(Finance)- History.2.Monetarypolicy- History.3.Economic
stabilization.I.Title.
HG229.B4852003
332.4'l-dc21 2002034659
ISBN978 184376 1556(cased)
978 1845427788(paperback)
Contents
Preface IX
Acknowledgements xi
1 Introduction 1
2 Inflation and monetary regimes 3
2.1 Inflations: long-termhistorical evidence 3
2.2 Adescription ofdifferentmonetary regimes 5
2.3 Monetary regimes and inflation 7
2.4 The inflationarybias ofpolitical systems 11
2.5 The influence ofmonetaryregimes 14
2.6 Some othercharacteristics ofmonetaryconstitutions 15
2.7 Conclusions 18
3 Inflation under metallic monetary regimes 21
3.1 Inflation causedby anadditional supply ofthe monetary
metal 21
3.2 The debasementofmetal standardsbyrulers 24
3.3 Reasons for the introduction andmaintenance ofstable
metallic monetary regimes 30
3.4 Price andexchange controls 32
3.5 Consequences ofinflation for the real economy 34
3.6 Conclusions 36
4 Moderate papermoney inflations 40
4.1 The introduction ofpapermoney 40
4.2 Papermoney inflation in Swedenduring the 18thcentury 41
4.3 Papermoney inflation in Massachusetts, 1703-1749 45
4.4 Inflation during theAmericanWarofIndependence 47
4.5 Papermoney inflationduring theAmerican Civil War 50
4.6 Chinese papermoney inflation underthe Ming regime 52
4.7 Conclusions 61
5 Characteristics ofhyperinflations 64
Introduction 64
5.1 Some characteristics ofthe French hyperinflation 66
v
VI Contents
5.2 Hyperinflations are causedby governmentbudgetdeficits 69
5.3 Real stock ofmoney and currency substitution 74
5.4 Undervaluation and currency substitution 82
5.5 *Undervaluationas aconsequence ofcurrency substitution:
a simple model 90
5.6 Othercharacteristics ofhyperinflations 92
5.6.1 Consequences ofhigh inflationfor capital markets 92
5.6.2 The developmentofprices 95
5.7 Economic activity andunemployment 101
5.8 The political economy ofhigh inflation 104
5.9 Social andpolitical consequences ofhyperinflation 107
5.10 Conclusions 110
6 Currency competition, inflation, Gresham's Law and
exchange rate 114
6.1 Introduction 114
6.2 Empirical evidence for periods one to three 116
6.3 *The model 118
6.4 *Firstperiod: introduction ofpapermoney 121
6.5 *Secondperiod: fixed exchange rate and loss ofofficial
reserves 122
6.6 *Thirdperiod: Gresham's Law atwork 123
6.7 *FourthPeriod: The return ofgood money 126
6.8 Conclusions 131
7 Ending mild or moderate inflations 135
7.1 Conditions favouring the stabilisationofmoderate inflation 135
7.2 Restoration ofstable monetary constitutions afterwars at the
oldparity 136
7.3 Preconditions for returning to a stable monetary regime ata
newparity 138
7.4 Furtherdiscussion ofhistorical examples 146
7.5 More recenthistorical examples 151
7.6 Conclusions 157
8 Currency reforms ending hyperinflations 160
8.1 Introduction 160
8.2 Political-economic preconditions for initiating successful
reforms 162
8.3 Sufficienteconomic and institutionalconditions for
successful currencyreforms 163
Contents Vll
8.4 Characteristics ofmost successful currency reforms:
empirical evidence 166
8.5 Less and least successful reforms 175
8.6 The influence ofwrongevaluations ofreform packages by
the public 189
8.7 Conclusions 193
Appendix Sources for historical datanotidentified in the textand
literature relatingto different cases ofhyperinflation 197
Index 207

Preface
Many good books and a huge number ofarticles have been written on infla
tion. As a consequence, a new book on this subject can only bejustified by
looking at events from a different perspective. This has been done in several
respects. First, a comparative historical analysis going back to the Roman
currencydebasementinthefourthcenturyandendingwiththehyperinflations
(that is high inflations with a monthly rate of50 per cent or more during at
leastonemonth) ofthe 1990shas beenused. Second,all29hyperinflations in
history (which all occurred, with the exception ofthe hyperinflation ofthe
FrenchRevolution, inthe20thcentury)andthecurrencyreforms endingthem
have been included in the analysis. Third, the political forces responsible for
inflationandforendingitbyadequatereformsarediscussed,togetherwiththe
conditions under which they can be expected to operate. Fourth, the impor
tance ofmonetary regimes for the stability ofmoney is documented. Fifth, it
isshownthatcertainqualitativecharacteristicsofinflationsandoftheirconse
quences are stable traits over centuries. Finally, a clear distinction has been
made between the differing traits of moderate and high inflations and the
reforms necessaryto endthem.
Chapter 1offers a very briefhistorical overview. In Chapter 2 the impor
tance ofmonetary regimes for monetary stability, given the inflationary bias
ofpoliticalsystems,isdocumentedanddiscussed. Chapter3analysesinflation
ifcommodity standards in the form ofmetallic monetary regimes are present.
InChapter4moderatepapermoneyinflations arestudied, whereas inChapter
5 all historical hyperinflations are extensivelyanalysed. Chapter6provides a
formal analytical framework for a complete inflationarycycle from the intro
duction ofpaper money to its total substitution by stable metallic money or
foreign currencies. In Chapters 7 and 8the political and economic conditions
for successfully terminating moderate and high inflations respectively are
described with the help ofcomparative historical analyses.
In writing the book formal mathematical analysis has been kept to a mini
mum. Still, someexceptionshavebeenmadeforadeeperunderstanding.They
canhoweverbe left outbythe readerwithout losing the general thread ofthe
argument, and have been noted with an asterisk *. To enliven the reading of
the book, short personal experiences of contemporary observers have been
insertedintothetext, especiallyinChapter5.Theyareobservationsbypeople
like Ernest Hemingway and Stefan Zweig, who did not have any knowledge
ix