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The Economics of World History Social Education 77(2), pp 87–90 ©2013 National Council for the Social Studies The Economics of World History : istory orld H Visions of Ination 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 Adam Smith and John ference between inflation and hyperin- Maynard Keynes in the March/April 2010 issue of Social Education as these two flation is one of degree. Typical inflation famous economists debated the economic recovery. Mr. Bernanke was visited once levels do not significantly alter people’s again by the ghosts of John Maynard Keynes and Milton Friedman 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. price 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 recession, a very rapid increase in the supply of Inflation has been present for as long and nearly destroyed the housing mar- money in an economy relative to the as societies have used money. Stories ket. In fact, angry homebuilders sent production of goods and services. This of economic calamities in world his- him two-by-fours in the mail. Finally, money printing causes the value of each tory frequently credit inflation as their however, inflation was once again under unit of the currency to fall and prices 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. Saving 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 unemployment. 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 Brazil, that is a specific price economies have experienced relatively attempted to design policies to remedy change due to supply and demand 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 deflation or a declin- dents—Nixon, Ford, and Carter. It took be supply improvements for eggs or veg- ing overall price level. 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 Venezuela led the world with prices cost. Volker pushed interest 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 economic history? 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 tax 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 economic policy symposium. The event for government intervention when the to address the problem through price is designed as a forum for central bank- economy slows. And he recalled conver- and wage 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 shortages on all sorts of the world and in key economies. Since In the twentieth century, Keynes was goods and services. 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 “aggregate demand” today. That’s as face, the meetings themselves involve role of the money supply 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 Weimar Republic 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 World War I 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 debts. 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 economist 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 debt 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.
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