Money Mischief_ Episodes in Monetary History - Milton Friedman [88]
Price and wage controls were not imposed at any time during the tapering down of inflation. And the tapering down occurred at the same time that Japan was adjusting to higher prices for crude oil.
Conclusions
Five simple truths embody most of what we know about inflation:
Inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various).
In today's world, government determines—or can determine—the quantity of money.
There is only one cure for inflation, a slower rate of increase in the quantity of money.
It takes time (measured in years, not months) for inflation to develop; it takes time for inflation to be cured.
Unpleasant side effects of the cure are unavoidable.
The United States has embarked on raising its monetary growth five times between 1960 and 1990. Each time the higher monetary growth has been followed first by economic expansion and later by inflation. Each time the authorities have slowed monetary growth in order to stem inflation. Lower monetary growth has been followed by an inflationary recession. Later still, inflation has declined and the economy has improved. So far, the sequence is identical with Japan's experience from 1971 to 1975. Unfortunately, until the 1980s the United States did not display the patience Japan did in continuing the monetary restraint long enough. Instead, our government overreacted to the recession by accelerating monetary growth, setting off on another round of inflation, and condemning the country to higher inflation plus higher unemployment. Finally, in the 1980s, the United States began to display some persistence. When more rapid monetary growth in late 1982 was followed by economic expansion, the Fed exercised monetary restraint in 1987, well before inflation could reach its prior peak, though not before it had risen appreciably above the low point reached in the mid-1980s. Once again the Fed is seeking to exercise the restraint required to reduce inflation permanently to low levels—and again we have experienced, as I write (July 1991), an inflationary recession, which seems to have ended, or to be on the verge of ending, though inflation has not yet come down appreciably.
We have been misled by a false dichotomy: inflation or unemployment. That option is an illusion. The real option is whether we have higher unemployment as a result of higher inflation or as a temporary side effect of a cure for inflation.
CHAPTER 9
Chile and Israel: Identical Policies, Opposite Outcomes*
Chile in 1979 and Israel in 1985 adopted identical monetary policy measures for the same purpose. The result was a disaster for Chile, an outstanding success for Israel. The two episodes provide a striking example of how the same monetary action can lead to very different results, depending on circumstances. The episodes also serve to clarify the fundamental difference between two superficially similar monetary standards: pegged exchange rates and a unified currency.
Chile
When General Augusto Pinochet overthrew the government of Salvador Allende, which had been in power in Chile since November 1970, and replaced it with a military junta in September 1973, he inherited a battered economy and an inflation of more than 500 percent a year. During the initial stage of the Pinochet regime, military officers were given the responsibility for economic policy, and the inflation increased still further—the direct consequence of financing a large deficit by the creation of money.*
In 1974, Pinochet realized that radical measures were necessary to curb the inflation. Accordingly, he decided to adopt a drastic reform