Money Mischief_ Episodes in Monetary History - Milton Friedman [95]
One particularly notable effect of the inflation and subsequent deregulation was the savings and loan crisis, which is imposing an extremely heavy cost on the federal insurance of deposits at savings and loans, and hence on taxpayers, and is threatening the solvency of the Federal Deposit Insurance Corporation.*
Irregular inflation and high and variable interest rates have produced similar developments in other countries. As a result, there is pressure for deregulation throughout the world.
It is worth stressing how little precedent there is for the present situation. Throughout recorded history, as noted in chapters 2 and 8, commodity money has been the rule. So long as money was predominantly coin or bullion, very rapid inflation was not physically feasible. The extent of debasement was limited by the ratio of the value of a given physical quantity of the precious metal to the base metal used as alloy. It took the invention and widespread use of paper money to make technically feasible the kind of rapid inflations that have occurred in more recent times.
In evaluating past experience with such episodes, Irving Fisher wrote in 1911: "Irredeemable paper money has almost invariably proved a curse to the country employing it" (1929, p. 131). Experience since Fisher wrote certainly conforms to his generalization. That period has seen the most extensive series of paper money disasters in history: the hyperinflations that followed World War I and World War II; the rapid inflations and hyperinflations in many South American and other countries around the world, particularly in many of the less-developed countries; and most recently, of course, the worldwide inflationary experience of the 1970s.
The end of specie standards and the emergence of a world monetary system in which every country, in Fisher's terms, has an "irredeemable paper money" have produced two very different streams of economic literature, one stream scientific and the other popular. The scientific literature deals with monetary reform and the government's role in providing what economists call outside money, in other words, money that is not a promise to pay but is simply money—full-bodied gold coins under a gold standard, paper money and deposits at the Federal Reserve under the current U.S. standard. The popular literature is alarmist and hard-money, essentially all of it based on the proposition that Fisher's generalization will continue to hold and that the world is inevitably condemned to runaway inflation unless and until the leading nations once again adopt commodity standards.
Interestingly enough, there has been little intersection between these two streams. In my opinion, the scientific literature has largely evaded the question raised by the popular literature: Have the conditions that produced the current unprecedented monetary system been accompanied by developments that change the likelihood that the system will go the way of all the earlier paper standards? The rest of this chapter offers some tentative and preliminary observations on this question.
Inflation, as pointed out in chapter 8, has always been an attractive alternative source of revenue, since it enables governments in effect to impose taxation without anyone's voting for it, and, in Keynes's words, "in a manner which not one man in a million is able to diagnose" (1920, p. 236). However, the existence of a commodity standard widely supported by the public served as a check on inflation. Certainly public opinion is the primary reason why hyperinflations, and even very rapid inflations, have been relatively