Money Mischief_ Episodes in Monetary History - Milton Friedman [71]
It follows that the different interpretations of the events from 1932 to 1936 are all consistent with the conclusion that the U.S. silver purchase program was responsible for the hyperinflation's occurring earlier and being more severe than it would have if the price of silver had not risen sharply. In that way the silver purchase program contributed to the ultimate triumph of communism in China.
CHAPTER 8
The Cause and Cure of Inflation
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
—JOHN MAYNARD KEYNES (1920, p. 236)
The Chinese hyperinflation is a striking example of Keynes's dictum. If the Chiang Kai-shek regime had been able to avoid inflation or keep it to single- or even low double-digit rates, whether by better management of its finances and its monetary policy or because of a different silver policy of the United States in the 1930s, the odds are high that China today would be a wholly different society.
War and revolution have been the progenitors of most hyperinflations. The earliest episodes in the West are the U.S. Revolution, with its Continental currency, and the French Revolution, with its assignats—both paper currencies that ultimately became nearly worthless.
The many earlier inflations included no hyperinflations for one simple reason. So long as money consisted of specie (whether gold, silver, copper, iron, or tin) inflation was produced either by new discoveries or technological innovations that reduced the cost of extraction or by debasement of the currency—the substitution of "base" metals for "precious" metals. New discoveries or innovations necessarily led to modest rates of growth in the quantity of money—producing nothing like the double-digit rates of inflation per month that are characteristic of hyperinflations. In the case of debasement, no matter how "base" the metal, it still cost something to produce, and that cost set a limit to the quantity of money. As Forrest Capie points out in a fascinating paper (1986, p. 117), it took a century for the inflation in Rome, which contributed to the decline and fall of the empire, to raise the price level "from a base of 100 in 200 AD to 5000...—in other words a rate of between 3 and 4 percent per annum compound." The limit was set by the relative price of silver, the initial money metal, and copper, the ultimate money metal. The implication is that the silver-copper price ratio was of the order of 50 to 1—roughly the same market ratio as in 1960. (Since then, silver has risen sharply in price relative to copper, so the ratio is now much higher.)
Inflation in the range to which we have become accustomed, let alone in the hyperinflationary range, became feasible only after paper money came into wide use. The nominal quantity of paper money can be multiplied indefinitely at a negligible cost; it is necessary only to print higher numbers on the same pieces of paper.
The first recorded "true currency," according to Lien-sheng Yang, author of Money and Credit in China—which is subtitled A Short History and covers more than two millennia—"appeared in Szechuan [China]...during the early part of the eleventh century" (1952, p. 52). It lasted for more than a century but eventually succumbed to the fatal temptation of inflationary overissue, "primarily," writes Yang, "to meet military expenditures." He records a number of additional paper money issues during the next five centuries in different parts of China and under various dynasties, each going through the same cycle of a period