Saturday, April 4, 2009

The Way Toward Hyperinflation

You don't have to read all of von Mises "Human Action" to get a basic handle on economics sans witch-doctory. Here's a start:
Mises was well aware of the final consequences of a monetary regime that rests on ever-greater increases in the money stock produced by banks' expanding circulation credit. It would, at some point, lead to bankruptcies on the grandest scale, resulting in a contraction of the credit and money supply (deflation).

Or it would end in hyperinflation:

But if once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse).[4]

Mises knew very well what he was referring to. He had lived through the period of great inflation that started in Europe in 1914 with World War I. This finally led to hyperinflation and a complete destruction of Germany's Reichsmark in 1923. On a technical level, Germany's hyperinflation was the result of the German Reichsbank monetizing the growing government debt, issued for financing social benefits, subsidies, and reparation payments.

In Age of Inflation (1979), reviewing Germany's hyperinflation from a political-economic viewpoint, Hans F. Sennholz asked, "Who would inflict on a great nation such evil which had ominous economic, social, and political ramifications not only for Germany but for the whole world?"[5] His sobering answer was that

[e]very mark was printed by Germans and issued by a central bank that was governed by Germans under a government that was purely German. It was German political parties, such as the Socialists, the Catholic Centre Party, and the Democrats, forming various coalition governments that were solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party.[6]

That said, the German hyperinflation was the result of a policy that considered the financing of government debt by an accelerating increase in the money stock as the politically least unfavorable method. It seems that the state of opinion hasn't actually changed much. Today, there is great public support when it comes to expanding the base-money stock for financing ailing banks, insurance companies and, most important, rising government debt.

"The doctrines and theories that led to the German monetary destruction have since then caused destruction in many other countries. In fact, they may be at work right now all over the western world."[7] Austrian economics would rightly maintain that current fiat-money polices have become increasingly inflationary — and they should have little doubt that the forces and instruments that can pave the way towards hyperinflation are already in place and gaining strength by the day .

No pretty but don't say you were never exposed to a history lesson from the master.

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