Sunday, June 23, 2013

Inflation and Monetary Crises - Part 1: A Crisis of Counterfeiting

In 1924, the German government printed and circulated a 100 trillion-mark note . Billions to tens of billions of marks were required to exchange for one dollar. This was the culmination of a period of catastrophic hyperinflation in which the value of the mark dropped, not by a few percentage points per year or even per month, but on an hourly basis. Prices rose from a few marks for common items first to hundreds, then to thousands, then millions and finally to billions of marks. A single egg was priced at 150 billion marks at one point. Workers demanded to be paid twice a day so that they could get rid of the money and exchange it for something --- anything tangible and physical --- before the money lost more of its value. An anecdote which may or may not be true in fact but which illustrates the nature of the crisis tells of a wheelbarrow full of cash found in the street that was dumped out so that the thief could make off with the wheelbarrow, never mind the cash. Money was so worthless that bills were burned in fireplaces to conserve firewood fuel. Life savings were wiped out. Economic and social chaos ensued. The crisis contributed to the rise of Hitler.

The story of Germany in the 1920’s is only one of the more dramatic historical examples of hyperinflation and its power to destroy civilization. Argentina in the 1980’s is another well-known example, described succinctly by Tom Chao:
“Argentina went through steady inflation from 1979 to 1991. Before 1979, the highest denomination was 10,000 Pesos. By 1981, the highest denomination was 1,000,000 Pesos. In the 1983 currency reform, 1 Peso Argentino was exchanged for 10,000 Pesos. In the 1985 currency reform, 1 Austral was exchanged for 1,000 Pesos Argentino. In the 1992 currency reform, 1 new Peso was exchanged for 10,000 Australes. The overall impact of hyperinflation: 1 new Peso = 100,000,000,000 pre 1983 Pesos.”

The fact is, just about any country in the world has experienced periods of high inflation at some time in its history and to the present day. A representative sampling of 55 national currencies in February 2007 revealed 21 which traded at more than 10 to the U.S. Dollar, of which 5 trade between 100 and 1000 to the Dollar and 7 which trade between 1000 and 25,000 to the Dollar . It is doubtful that any of these currencies were originally established at such valuations; it is also likely that many of the more ‘normal’ currencies are only trading within a reasonable range following one or more orders-of-magnitude re- (or de-) valuations.
It doesn’t take a hyperinflation on the order of tens of percentage points per month in order to destroy wealth and leave a lasting impression. People who have sacrificed, scrimped and set aside pennies, earning a few percent on their savings each year, can have decades’ worth of saving wiped out by ‘mere’ double-digit annual inflation. The decline and fall of the Roman Empire has been blamed by some on erosion of the currency’s value. The 1970s is remembered by the baby-boom generation of America very negatively as the decade of ‘malaise’, never to be repeated, even though inflation was ‘only’ between 10 and 20 percent per year.
Inflation leaves deep mental impressions upon those who live through it.
The currency crisis in France following World War II was mild compared to the one in Germany in the 20’s. Yet 25 years after President de Gaulle created the ‘new Franc’ which was reset at 100 times the old depreciated one in order to normalize its value (to something on the order of an American quarter dollar), I personally met many older-generation people in France on different occasions who would go through a moment of mental hesitation when computing or contemplating complex or large monetary amounts, calculating and re-calculating the value in terms of ‘ancien’ and ‘nouveau’ (‘old’ and ‘new’).

We see that inflation is a significantly evil, destructive force in the economy, to be contained, preferably extinguished completely. But not only do people disagree on the cause (greedy businessmen, greedy unions, greedy consumers, greedy speculators, greedy foreigners or greedy politicians), they frequently can’t agree even on exactly what inflation is. So, permit me to assert the following definition, which the next section will be required to explain in detail:
• Inflation is: Government-initiated counterfeiting on a massive scale.

Inflation is the introduction of an excess of paper money or (electronic) credits into an economy over the real assets of the economy. It is caused essentially by the government creating, out of thin air, what is essentially counterfeit money.

See Part 2 HERE.