Econ 101 part 4 (paper and runaway inflation)

Last time we looked at how governments could debase the currency and steal money even if the currency were gold or silver coins. This was a time honored way for the government to steal money to pay for wars and welfare, without high taxes which can lead to unwanted unrest. Ah, but paper money, now there is a concept that turns out to be a wonderful concept for governments to loot the public.

If a government prints more money, then the money already in circulation is worth less. With paper money not tied to any redeemable amount of precious metal, the government may print as much as it deems it needs to do. Heck, sometimes it prints too much money even if it has "promised" to redeem the paper currency for solid precious metal. Governments sometimes don't tell the truth, perhaps you have noticed this. Glenn Greenwald has made a new carrier of documenting government lies.

Inflation is an increase in the money supply. Inflation leads to rises in price because the increase in the amount of money in circulation has made all the old money worth less than it did before. As an example, if I were selling apples for a dollar a piece today (less than they are at Publix), and the rate of inflation were 10% then I would have to rise my price to $1.10 by the end of the year just to keep at the same level I was before. I have not raised my price in real terms, only kept up with inflation.

So, how high can prices go? How fast can it happen? Has it ever happened in real countries on the planet earth before? Let us look to history for answers. Wikipedia has an excellent list of countries that have experienced hyper-inflation. See it here: http://en.wikipedia.org/wiki/Hyperinflation

In Germany in 1914 the cost of a pound of butter was a little over one Mark. By 1918 the cost had risen to 3 Marks. By 1922 a pound of butter was 2,400 Marks, and the next year it went to 6,000,000,000,000 Marks. Yes, one pound of butter went from a Mark to six Trillion Marks in 9 years. One egg in 1914 was under a Mark and 9 years later it was 80 Billion Marks. This level of inflation is such a society killer that governments have tried to cause runaway inflation in the economy of their enemies during wartime.

The German government bragged about its efficiency at printing money. They had twelve printing operations running 24 hours a day pumping out new currency! How could anyone set a fair price for something? If I sold a farm for 3,000 marks to you one year, it might cost 3 Trillion to buy one like it a couple of years later! How can society run in this sort of chaos?

I believe that most humans can understand the evils of runaway inflation. The only people who would want such a thing (mistakenly) are those so deeply in debt that forcing even a large debt to become mere pocket change is a "good thing to them personally". (assuming they give up eating food that is)

Next time we will look at a much more modern way for the government to inflate the currency. We are "blessed" with modern technology which allows for efficiency that the Germans could only dream of. After that, we will look at inflation as a government policy (not runaway inflation) and who benefits from the policy.