Money Mischief_ Episodes in Monetary History - Milton Friedman [72]
Paper money came into wide use in the West only in the eighteenth century. It began, so I believe, with John Law's "Mississippi Bubble" of 1719–20, when, as the Encyclopaedia Britannica (1970) puts it, "the excessive issue of bank notes stimulated galloping inflation with commodity prices more than doubled" (see also Hamilton 1936)—a pale precursor of the million-, billion-, and trillionfold multiplication of prices in subsequent true hyperinflations.
Until recent decades, all the hyperinflations that I know of were the product of war or revolution. But that is no longer the case. Bolivia, Brazil, Argentina, Israel have all had hyperinflations in peacetime—hyperinflations that are still continuing, as I write, in Brazil and Argentina. And there may well be others that I am not aware of. The reason, as we shall see, is because war and revolution are no longer the only, or even the primary, reasons why governments resort to the printing press to finance their activities.
Whatever its proximate source, inflation is a disease, a dangerous and sometimes fatal disease, a disease that, if not checked in time, can destroy a society, as it did in China. The hyperinflations in Russia and Germany after World War I prepared the ground for communism in the one country and nazism in the other. When inflation in Brazil reached 100 percent a year in 1954, it brought military government. More extreme inflations also brought military government to Chile and Argentina by contributing to the overthrow of Salvador Allende in Chile in 1973 and of Isabel Peron in Argentina in 1976. Repeated inflations in Brazil and Argentina in the 1980s have led to repeated unsuccessful "reforms," the replacement of governments, flights of capital, and heightened economic instability.
No government willingly accepts the responsibility for producing inflation even in moderate degree, let alone at hyperinflationary rates. Government officials always find some excuse—greedy businessmen, grasping trade unions, spendthrift consumers, Arab sheikhs, bad weather, or anything else that seems remotely plausible. No doubt businessmen are greedy, trade unions are grasping, consumers are spendthrifts, Arab sheikhs have raised the price of oil, and the weather is often bad. Any of these can produce high prices for individual items; they cannot produce rising prices for goods in general. They can cause temporary ups and downs in the rate of inflation. But they cannot produce continuing inflation, for a very simple reason: not one of the alleged culprits possesses a printing press on which it can legally turn out those pieces of paper we carry in our pockets and call money; none can legally authorize a bookkeeper to make entries on ledgers that are the equivalent of those pieces of paper.
Inflation is not a capitalist phenomenon. Yugoslavia, a communist country, has experienced one of the most rapid rates of inflation of any country in Europe; Switzerland, a bastion of capitalism, one of the lowest. Neither is inflation a communist phenomenon. China had little inflation under Mao; the Soviet Union had little for decades, though it is now (1991) in the midst of rapid inflation; Italy, the United Kingdom, Japan, the United States—all largely capitalist—have experienced substantial inflation, most recently in the 1970s. In the modern world, inflation is a printing-press phenomenon.
The recognition that substantial inflation is always and everywhere a monetary phenomenon is only the beginning of an understanding of the cause and cure of inflation. The more basic questions are: Why do governments increase the quantity of money too rapidly? Why do they produce inflation when they understand its potential for harm?
The Proximate Cause of Inflation
Before turning to those questions, it is worth dwelling a while on the proposition that inflation is a monetary phenomenon. Despite the importance