Money Mischief_ Episodes in Monetary History - Milton Friedman [75]
Figure 4
Three Decades of Money and Prices in Japan, 1961–1990
As the charts show, money and prices clearly move together. But that leaves open the question of which causes which. Do prices go up because the quantity of money increases, or vice versa? A large number of historical episodes make it crystal clear which is cause and which is effect.
Figure 5
A Quarter Century of Inflation in Brazil, 1965–1989
One dramatic example comes from the American Civil War. The South financed the war largely through the printing press, in the process producing an inflation that averaged 10 percent a month from October 1861 to March 1864. In an attempt to stem the inflation, the Confederacy enacted a monetary reform: "In May, 1864, the currency reform took hold, and the stock of money was reduced. Dramatically, the general price index dropped ... in spite of invading Union armies, the impending military defeat, the reduction in foreign trade, the disorganized government, and the low morale of the Confederate army. Reducing the stock of money had a more significant effect on prices than these powerful forces" (Lerner 1956, p. 172). Such examples can be multiplied manyfold. In substantial inflations, money is the cause (or proximate cause), the rise in prices the effect.
The charts and this conclusion dispose of many widely held explanations of inflation. Labor unions are a favorite whipping boy. They are accused of using their monopoly power to force up wages, which drive up costs, which drive up prices. Then how is it that the charts for Japan, where unions are of minor importance, and for Brazil, where they exist only at the sufferance and under the close control of the government, show the same relation between prices and money as do the charts for the United Kingdom, where unions are stronger than in any of the other nations, and for Germany and the United States, where unions have considerable strength? Unions may provide useful services for their members, and they may also do a great deal of harm, by limiting employment opportunities for others. But they do not produce inflation. Wage increases in excess of increases in productivity are a result of inflation, rather than a cause.
Similarly, businessmen do not cause inflation. Businessmen are surely no more greedy in countries that have experienced much inflation than they are in countries that have experienced little, no more greedy at one period than another. How, then, can inflation be so much greater in some places and at some times than in other places and at other times?
Another favorite explanation of inflation, particularly among government officials seeking to shift blame, is that it is imported from abroad. That explanation was often correct when the currencies of the major countries were linked through a gold standard, as we saw in chapter 3. Inflation was then an international phenomenon because many countries used the same commodity as money and anything that made the quantity of that commodity money grow more rapidly affected them all. But the explanation clearly is not correct for recent years. If it were, how could the rates of inflation be so different in different countries? Japan and the United Kingdom experienced inflation at the rate of 30 percent or more a year in the early 1970s, when inflation in the United States was around 10 percent and in Germany under 5 percent. Inflation is a worldwide phenomenon in the sense that it occurs in many countries at the same time—just as high government spending and large government deficits are worldwide phenomena. But inflation is not an international phenomenon in the sense that each country separately