Wednesday 261014

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 29 of 36 Money Growth and Inflation
Section 12 of 29
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Figure 4 - The quantity of money and the price level during four hyperinflations
In each case, the quantity of money and the price level move closely together.
The strong association between these two variables is consistent with the quantity theory of money which states growth in the money supply is the primary cause of inflation.
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Occurrences of hyperinflation offer data we can use to study the effects of money on the economy.
With hyperinflation there are huge changes in the money supply and price level.
Hyperinflation is defined as inflation exceeding 50% per month.
This results in the price level increasing more than a hundred times over a year.
Data on hyperinflation show a direct link between the quantity of money and the price level.
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Figure 4 graphs data from four hyperinflations that occurred in the 1920s in Austria, Hungary, Germany, and Poland.
Each graph shows the economy’s quantity of money and a price level index.
The slope of the blue money line represents the rate of growth of the quantity of money.
The slope of the red price line represents the inflation rate.
The steeper the lines, the higher the rates of money growth and inflation.
Notice in each graph the change of quantity of money and price level are almost the same.
At first growth in the quantity of money and inflation are moderate.
Over time quantity of money and inflation starts growing at an increasing rate.
When the quantity of money stabilizes, so does the price level.
These examples illustrate one of the Ten Principles of Economics, #9: Prices rise when the government issues too much money.
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it grows at an increasing rate
zōka-ritsu de fueru
増加率で増える
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Why didn’t these four countries simply stop increasing the money supply? ChatGPT:
They eventually did — but simply stopping money creation was difficult because their governments were spending far more than they could collect in taxes or borrow.
After World War I, Austria, Hungary, Germany, and Poland faced disrupted economies, large government obligations, weak tax systems, debts and —in Germany especially— reparations.
Investors were unwilling to lend them enough money, so their governments increasingly financed deficits by having the central bank create money. Inflation then made tax revenues lose value before the government received them, worsening the deficit and creating a vicious circle.
To stop the hyperinflation they had to do more than stop creating money: they had to cut government deficits, improve tax collection, restore confidence, reorganize their currencies and banking systems, and in some cases obtain foreign financial assistance.
Germany finally succeeded in late 1923 by sharply limiting deficit financing and introducing the Rentenmark.
> The Rentenmark was a new German currency introduced in November 1923 to stop the country’s hyperinflation. It replaced the nearly worthless paper mark at a conversion rate of 1 Rentenmark = 1 trillion old marks. Germany did not have enough gold to back the new currency, so the Rentenmark was instead supported by mortgages and claims on German agricultural and industrial property. The government also sharply restricted new money creation and reduced deficit financing. Confidence returned quickly, prices stabilized, and in 1924 the Rentenmark was supplemented by the new Reichsmark. <
The important lesson from the Figure 4 graph is hyperinflation continued because governments felt they could not stop creating money until the underlying fiscal crisis was solved.