Money Mischief_ Episodes in Monetary History - Milton Friedman [74]
Figures 1 and 2, for the United States and Britain, cover a full century, in order to show how persistent the relation is despite vast changes in circumstances. (Chapter 3 covers the earlier part of this period in greater detail.) Until 1931, both countries were on a gold standard (except for Britain, from 1915 to 1925) and were linked by a fixed exchange rate, which explains why the patterns for the two countries are so similar before World War II. For both countries, also, the years of the two world wars stand out sharply, displaying rapid monetary growth. There is an interesting difference about the two world wars, though: in the first war, the price rise roughly parallels the rise in money; in the second, the price rise is slower and more spread out and does not match the money rise until the end of the 1950s. The difference is partly a statistical illusion; in World War II, the price rise was suppressed and spread out by a far greater reliance on price controls and rationing.
Figure 1
A Century of Money and Prices in the United States, 1891–1990
Before World War I and in the period between the two wars, prices were relatively stable, except for the sharp drop in prices in the United States during the Great Depression. The period after World War II is very different, displaying peacetime rates of rising prices that rival or even exceed the rates experienced during the war. Moreover, the money and price-level lines hug each other much more closely after the war than before (perhaps simply because the data have become more accurate).
All told, in the United States, prices in 1990 were fifteen times their initial level in 1891; in Britain, fifty times. The divergence between the two countries came mostly during and after World War II, when the gold-standard link was no longer there to tie prices in the two countries together. The rate of inflation during the first half of the century (1891–1940) averaged under 1 percent a year in the United States, 1.6 percent in Britain. During the second half it quadrupled in both countries, averaging 4 percent in the United States, 6.4 percent in Britain.
Figure 2
A Century of Money and Prices in the United States, 1891–1990
The charts for Germany and Japan (Figures 3 and 4) cover a shorter period, the three decades from 1961 to 1990. In both countries, money rose more rapidly than prices: in Germany, 4.8 percent a year for money versus 2.7 percent for prices; in Japan, 7 percent for money versus 5.7 percent for prices. The rapid growth in output and in financial activities in both countries led to a greater demand for real money balances per unit of output (a decline in velocity). The same phenomenon had occurred in the United States at an earlier date, as can be seen in Figure 1. Although both Japan and Germany are correctly regarded as countries with relatively low inflation, in both countries inflation was decidedly higher than it had been before World War II in gold-standard countries.
Figure 3
Three Decades of Money and Prices in Germany, 1961–1990
The chart for Brazil (Figure 5) covers an even shorter period, the quarter century from 1965 to 1989, because of data limitations. It tells a story of hyperinflation, with the price level at the end nearly 6 million times the level at the beginning—an average rate of inflation of 86.5 percent a year. Oh, the power of compound interest! As the chart shows, the inflation accelerated during the period; in the final years, the rate of inflation per month was running higher than the average annual rate for the period as a whole. And the end may not yet be in sight.