FREE ESSAY ON INFLATION

INFLATION

Hyperinflation 
The term hyperinflation refers to a very rapid, very large increase in the
price level. Measurement problems will be too minor to notice on this
scale. There is no strict formal definition for the term, but cases of
hyperinflation tend to be expressed in terms of multiples rather than
percentages. For example, in Germany between January 1922 and
November 1923 (less than two years!) the average price level increased
by a factor of about 20 billion. Some representative examples of
hyperinflation include
Hyperinflation 
1922 Germany 5,000% 
1985 Bolivia *10,000% 
1989 Argentina 3,100% 
1990 Peru 7,500% 
1993 Brazil 2,100% 
1993 Ukraine 5,000%
These quotations from other web pages are given mainly as examples of
what people have in mind when they talk about hyperinflation, and I cannot
say just how accurate the figures are. In any case, figures for the
purchasing power lost in hyperinflations can only be rough estimates.
Numismatics (coin and currency collecting) gives some examples of just
how far hyperinflations can go: an information page for currency collectors
tells us that, in the Hungarian hyperinflation after World War II, bills for
one hundred million trillion pengos were issued (the pengo was the
Hungarian currency unit) and bills for one billion trillion pengos were
printed but never issued. (I'm using American terms here -- the British
express big numbers differently). 
The story behind the German hyperinflation illustrates how all
hyperinflations have come about, and is of particular interest in itself. After
World War I, Germany had a democratic government, but little stability. A
general named Kapp decided to make himself dictator, and marched his
troops and militias into Berlin in an attempted coup d'etat known as the
Kapp Putsch. However, the German people resisted this attempt at
dictatorship with nonviolent noncooperation. The workers went out in a
general strike and the civil servants simply refused to obey the orders of
Kapp and his men. Unable to take command of the country, Kapp
retreated and ultimately gave up his attempt. 
However, the German economy, never very sound, was further disrupted
by the conflict surrounding Kapp's putsch and by the strike against it; and
production fell and prices rose. The rise in prices destroyed the purchasing
power of wages and government revenues, and the government responded
to this by printing money to replace the lost revenues. This was the
beginning of a vicious circle. Each increase in the quantity of money in
circulation brought about a further inflation of prices, reducing the
purchasing power of incomes and revenues, and leading to more printing
of money. In the extreme, the monetary system simply collapses. In
Germany, people would rush out to spend the day's wages as fast as
possible, knowing that only a few hours' inflation would deprive today's
wages of most of their purchasing power. One source says that people
might buy a bottle of wine in the expectation that on the following morning,
the empty bottle could be sold for more than it had cost when full. Those
with goods to barter resorted to barter to get food; those with nothing to
barter suffered. 
This is the way that hyperinflations happen: by a self-reinforcing vicious
cycle of printing money, leading to inflation, leading to printing money, and
so on. This is one reason why inflation is feared. There is always the
concern that even a little inflation this year will lead to more next year, and
so on. But some countries have experienced very great inflations -- 50 to
100% per year -- without ever falling into the cycle of hyperinflation, and
there has never been a hyperinflation that could not have been avoided by
a simple government determination to stop the expansion of the money
supply. 
The key point is this: the monetary system can function reasonably well as
long as the value of the monetary unit is reasonably stable and predictable,
and the high standards of living of modern societies cannot exist without a
functioning monetary system. 
The Problem of Stagnation 
Copyright 
Bibliography
Various sources