Social Education 77(2), pp 87–90 ©2013 National Council for the Social Studies The of World History

: istory orld H Visions of In ation in W * Ghost Story III

M. Scott Niederjohn, Mark C. Schug, and William C. Wood

* This article represents the third in a “ghost story” series by the same authors. Readers What about hyperinflation? The dif- may recall that Mr. Bernanke was “visited” by the ghosts of and John ference between and hyperin- Maynard Keynes in the March/April 2010 issue of Social Education as these two flation is one of degree. Typical inflation famous debated the economic recovery. Mr. Bernanke was visited once levels do not significantly alter people’s again by the ghosts of and in the March/ behavior. In contrast, hyperinfla- April 2012 issue of Social Education and discussed the then new quantitative easing tion, commonly defined as an overall policy of the Fed. increase greater than 50 percent per month,1 forces people to adjust. Hyperinflation is typically caused by Why Worry about Inflation? 20 percent, induced a deep , a very rapid increase in the supply of Inflation has been present for as long and nearly destroyed the housing mar- in an economy relative to the as societies have used money. Stories ket. In fact, angry homebuilders sent production of and services. This of economic calamities in world his- him two-by-fours in the mail. Finally, money printing causes the of each tory frequently credit inflation as their however, inflation was once again under unit of the to fall and nec- source. The United States’ last big show- control, which set the stage for decades essarily skyrocket. Because the value of down with inflation dates back several of economic expansion. the money is declining at warped speed, decades, to the sluggish 1970s. After While many nations have experienced people can’t spend it fast enough. Normal growing at nearly 4.5 percent in the rounds of high inflation, others have economic behavior is replaced by panic 1950s and 1960s, the U.S. economy endured crushing rounds of hyperin- spending. and investing becomes grew at an average of only about 3 flation. What is inflation? Inflation is pointless and the economy frequently percent in the 1970s. In the meantime, defined as a sustained rise in the gen- collapses. inflation surged unexpectedly. And so eral level of prices. But, not every price Have the nations of the world learned did . Americans experi- increase represents inflation. When the to avoid hyperinflation? Table 1 (on enced double-digit inflation in the years price of coffee increases because of a crop p. 88) shows that the world’s largest of 1974, 1979, and 1980. Presidents failure in , that is a specific price economies have experienced relatively attempted to design policies to remedy change due to of a low levels of inflation recently. Japan the problem without success. Inflation particular good. At the same time as that continues to struggle with a different defeated the actions of three U.S. presi- Brazilian coffee crop failure, there might problem called or a declin- dents—Nixon, Ford, and Carter. It took be supply improvements for eggs or veg- ing overall . However, low a mix of extreme actions of Federal etables that push their prices down. Only levels of inflation are not universal. In Reserve Chairman Paul Volker to when the average of all prices is going up 2011, Iran experienced yearly inflation finally break the inflation problem. do we have an actual inflation, defined of almost 21 percent, Sudan 18 percent, These monetary policies came at a high as “a sustained increase in average prices and led the world with prices cost. Volker pushed rates to over across the economy.” rising at over 26 percent per year. March / April 2 013 87 Table 1: Inflation Rates among World Economies you said that, Milton, I would have disagreed. “Always and everywhere” World Inflation and Inflation in the World’s 2011 Estimated Rate of Inflation a monetary phenomenon? With your Largest Economies (percents) exclusive focus on money, you are World 5 ignoring some important forces. If United States 3.1 an economy is running fast, near full China 5.5 employment, of course money will lead to inflation. But if it has a lot of slack, Japan - 0.3 money can be increased without leading Germany 2.5 to inflation. Didn’t you chaps ever teach France 2.3 ? United Kingdom 4.5 Friedman: Of course I did. I always Brazil 6.6 enjoyed pointing out how, during the Source: Central Intelligence Agency. The World Factbook (see: https//www.cia.gov/) days of the Roman Empire, the cur- rency was devalued. The economy was approaching collapse due to the inability Central Bankers Meet at Jackson Keynes, whom he met only through of revenues to keep pace with spend- Hole in 2012 books, and Milton Friedman, whom ing by government bureaucrats and the Since 1978, the Federal Reserve Bank he knew personally. Bernanke remem- military. Roman Emperor Diocletian— of Kansas City has hosted an annual bered studying Keynes’s arguments not unlike President Nixon—attempted symposium. The event for government intervention when the to address the problem through price is designed as a forum for - economy slows. And he recalled conver- and controls, but those, of course, ers, policy experts, and academics to sations with Milton Friedman in 2002 only made matters worse by causing examine emerging issues and trends in at Friedman’s 90th birthday celebration. widespread on all sorts of the world and in key economies. Since In the twentieth century, Keynes was . 1982, the meetings have been held in the most prominent advocate of active Keynes: Ah, incompetent price con- Jackson Hole, Wyoming, a picturesque government management of the economy trols. None of us favored those. But in location known for its mountain views and Friedman was the most noted cham- my time I tried to show leaders that the and terrific trout fishing. pion of free markets. Friedman was also government had to manage the total While the Wyoming venue may known for being a monetarist—a school demand of an economy—what you call appear calm and relaxed on the sur- of economic thought that emphasizes the “” today. That’s as face, the meetings themselves involve role of the on the economy. important as managing money. high stakes. In 2012, Federal Reserve Friedman: You’re not saying money Chairman Ben Bernanke was joined Ben’s Dream is unimportant in determining inflation, by financial leaders from around the Bernanke’s dream that night may have are you? world including representatives from the gone something like this: Keynes: Not at all. Money is espe- Bank of England, Bank of Japan, Bank Bernanke: Could it be? Milton, my cially important in cases of hyperinfla- of Israel, as well as others from Sweden, friend, it is good to see you after such tion. Do you remember the inflation of Iraq, Turkey, Mexico, Ireland, Brazil a long time. the that I wrote about and many more. Friedman: Greetings, Ben. The plea- in The Economic Consequences of the Our “ghost story” picks up here, on sure is all mine. Peace?3 I pointed out that Germany’s the first night of the conference, with Bernanke: And is that John Maynard reparations for were exces- Bernanke slipping away from his col- Keynes standing before me? sive and the peace treaty too vindictive. leagues to turn in early. For weeks, he Keynes: I am always ready to help When Germany had to pay those repa- and his staff had been preparing for when a major economy slows. rations, it faced large deficits and had these meetings. His speech was ready. Bernanke: You know, Milton, I never little alternative but to print more paper Now, he wished to get a good night’s have forgotten your famous statement: money in order to satisfy its . sleep and be well rested for the next day’s “Inflation is always and everywhere a Friedman: But, of course, as we events. He was asleep before his head monetary phenomenon, in the sense that both know, there was much more to hit the pillow, and he drifted into a deep it cannot occur without a more rapid the story. Part of the problem was that dream. In it, he recalled his encounters increase in the quantity of money than Germany did not have access to the with two late great economic thinkers: in output.”2 international bond markets during the the British John Maynard Keynes: If I had been alive when war. New York, London, and Paris were

Social Education 88 off limits. While Berlin and Vienna sive budget deficits that were financed it also increased prices for other items were important financial centers, it was with borrowing from abroad and from like energy and food. This raised costs not enough. After they had sold all the Argentinean citizens, the country was for businesses and made consumers bonds they could internally, Germany left with so much and no other feel poorer. Meanwhile, the unemploy- and its allies turned to central banks to country willing to lend it any more ment rate remained high and economic increase the money supply by issuing money, the leaders felt compelled to growth sluggish. Doesn’t sound like a Treasury bills. This helped set the stage resort to the printing press. In July 1989, huge success to me. for the later inflation. saw 200 percent inflation for Keynes: You fellows are still worried Keynes: And, then, of course, things the month, peaking at 5,000 percent for about the amount of money, when you got much worse. Germany was defeated. the year. As prices increased, real should be focusing on the total demand Those who had bought war bonds lost fell by almost half. Milton, that made for goods and services. If you ask me, I out as the nation faced bankruptcy. The me even more convinced that you mon- say you should do additional stimulus Weimar Republic spent recklessly, etarists were right about hyperinflation. with public works projects. That will running large deficits and facing the Friedman: Yes, 1989 was a disaster. pep up aggregate demand. And, can’t burden of excessive reparations. You In addition, Argentina’s serial defaults you do something about housing with know, Milton, sometimes people say on its debts in 1982, 1989, 2002, and your ? I’m too tolerant of inflation, but I did 2004 did little to foster international Bernanke: Actually, I’m optimistic say in The Economic Consequences of confidence in investing in Argentina. that the biggest impact with our new the Peace: “By a continuing process of Keynes: But remember, in Argentina round of easing will be seen in the inflation, governments can confiscate, we’re talking about massive increases of housing . Many homeowners secretly and unobserved, an important government spending and money, not have been unable to benefit from low part of the wealth of their citizens.” the careful management of economic interest rates because banks have been Friedman: There we agree. One ups and downs such as I recommended. reluctant to write new loans. If banks might think that the experiences of the Friedman: Should we worry that the are not lending this money out, it never Weimar Republic would have been a policies of the Fed today may result in enters the economy. Theoretically, stern message to governments around large increases in the rate of inflation this money never becomes part of the the world to act quickly to prevent run- sometime in the future? money supply and therefore does not away inflation. Argentina was, in 1913, Keynes: Oh, poppycock, Milton. have an effect on the rate of inflation. one of the wealthiest economies in the There is a lot of unemployment—and Millions of people have been unable world. Yet, it never lived up to those many underused resources— in the to refinance because they owe more early expectations. U.S. economy today. Increasing the than their homes are worth. Buying Keynes: Yes, I had high hopes for economy’s total demand is just the mortgage-backed securities from banks Argentina. It had great resources and right thing to do now. You can worry will free them up to do more lending an excellent workforce. All that coun- about inflation when you get closer to and help the recovery of the housing try needed was good leadership and full employment. Ben, surely you’re not market. a will to manage the economy’s total worried about inflation? Keynes: Ben—may I call you Ben?—I demand. But near the end of my life, I Bernanke: I have to worry. As both have one main fear about your con- was troubled by the rise of that young of you know, I have a job to do. The Fed tinued low policies. Your military officer Perón. has a dual mandate—stable prices and government is carrying a lot of debt Friedman: Yes, Juan Perón. His high employment. Our current poli- now, not unlike some famous troubled quasi-fascist policies helped set the cies—which include buying mortgage- economies in history. When interest stage for economic disaster. He favored backed securities and treasury bills rates increase, as you know they will, tariffs to protect Argentinean industri- from banks—are intended to lower the national debt will soar from inter- alists and generous wages and benefits long-term interest rates. That should est payments alone. That will displace to Argentinean workers resulting in encourage investors to buy assets with spending for all sorts of other impor- large deficits. While many regimes fol- higher returns and greater risk, such as tant government functions from courts lowed Perón (who returned two more stocks and corporate bonds. The idea to roads to education. I have always times as president), Argentina’s govern- is to get the economy moving again and been for well chosen government ment leaders showed little interest in reduce unemployment. spending projects. restraining spending. Friedman: But, will it work? The Friedman: I have only one fear, Ben. Bernanke: May I jump in, guys? last round of quantitative easing (QEII) You’ve been expanding the amount of I remember well what happened in succeeded in increasing stock prices for money a lot. Any monetarist has to Argentina in 1989. After years of mas- a time so some people felt wealthier. But worry about that. Will you be able to March / April 2 013 89 unwind from your expansionary poli- they would argue is consistent with their enough. It’s enough to give a Federal cies at exactly the correct time to avoid dual mandate of stable prices and high Reserve chairman nightmares. touching off a round of serious infla- employment. That is, as long as unem- tion? You’re good Ben, I just don’t think ployment remains high, the Fed has a Notes you’re that good. duty to act. 1. N. Gregory Mankiw, Principles of (Mason, Ohio: Cengage Southwestern, 6th ed. 2012), Other economists worry that the Fed’s 356. Conclusion actions are bound to lead to high infla- 2. Quoted in Peter Coy, “Milton Friedman: Death of a Giant,” Business Week (November 17, 2006), www. Bernanke awoke from his dream, tion in the future. The Fed has more businessweek.com/stories/2006-11-17/milton-fried- reminded that well-known economists than doubled its balance sheet since man-death-of-a-giantbusinessweek-business-news- of today are not unanimous concern- the economic calamities of 2007; this stock-market-and-financial-advice 3. John Maynard Keynes, The Economic Consequences ing his policies. On the one hand, many kind of increase in the supply of money of the Peace (New York: Harcourt Brace and Howe support the Fed’s actions, arguing that has been known to cause serious infla- 1920). the continued weak economy provides tion many times in recent history. Is the impetus for such monetary action. Friedman right? Is it true that “Inflation M. Scott Niederjohn is associate professor of Economists of this opinion further is always and everywhere a and director of the Center for Economic argue that at a time of government grid- phenomenon”? The United States has Education at Lakeland College in Sheboygan, Wiscon- sin. He can be reached at [email protected]. lock—and without a consistent fiscal not yet experienced significant price Mark C. Schug is professor emeritus at the Uni- policy response from Washington—the increases and the Fed can, of course, versity of Wisconsin-Milwaukee. He can be reached at Fed must act to stabilize the economy. reverse its policies should inflation [email protected]. William C. Wood is professor In contrast to the Fed’s actions during become an issue. In the end, perhaps of economics and director of the Center for Economic Education at James Madison University in Harrison- the , the current Fed the real question is whether the Fed burg, Virginia. He can be reached at [email protected]. has behaved in an activist manner that will be willing and able to act quickly

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