Money Mischief_ Episodes in Monetary History - Milton Friedman [98]
Inflation has come down in the United States from double digits to low single digits, and there is widespread support for the Federal Reserve's repeatedly stated intention to reduce inflation still further from the 3 percent to 5 percent level that has prevailed from 1983 on.
As we saw in chapter 8, Japan offers perhaps the most impressive example. In the early 1970s, inflation in Japan reached levels well over 20 percent. The government and the Bank of Japan reacted promptly and effectively, bringing down sharply the rate of monetary growth. They have continued to maintain a relatively steady rate of monetary growth. As a result, not only has inflation been brought down to low levels, but also Japan has escaped the sharp ups and downs in inflation that have plagued many other countries.
Germany offers an example of a rather different kind, an example of how experience can alter the political attractiveness of the inflation option. Throughout the post-World War II period, Germany has tended to have lower inflation than the United Kingdom, the United States, and most other Western countries. The reason clearly seems to be the long-term effects of the post-World War I hyperinflation, reinforced by the post-World War II experience of suppressed inflation, which incapacitated the monetary system and forced a resort to barter.
Similarly, the United Kingdom succeeded for a time in sharply reducing inflation after having experienced double-digit inflation and despite an accompanying rise in unemployment. That has also been true for France and other countries in the Common Market that have linked their currencies through the European Monetary Union.
The apparent decline in the political profitability of inflation is a source of promise, but it is far from a guarantee that Fisher's generalization is obsolete. Governments often act under short-run pressures in ways that have strongly adverse long-run consequences. Israel in the early 1980s offers a conspicuous example. It continued to resort to inflation under conditions that made inflation a poor source of revenue; indeed, in the particular circumstances of Israel, the inflation may have been a drain on government resources rather than a source of revenue. However, in 1985, as we saw in the preceding chapter, Israel, too, took strong steps to end inflation.
Nonetheless, it remains an open question whether the temptation to use fiat money as a source of revenue will lead to a situation that will ultimately force a return to a commodity standard—perhaps a gold standard of one kind or another. The promising alternative is that over the coming decades the advanced countries will succeed in developing monetary and fiscal institutions and arrangements that will provide an effective check on the propensity to inflate and that will again give a large part of the world a relatively stable price level over a long period of time.
The final answer will come only as history unfolds over the next decades. What that answer will be depends critically on our success in learning from historical episodes such as those that have been examined in this book. Such a learning process has been under way for centuries, ever since the first appearance of systematic analyses of money and monetary institutions. It has entered a new and urgent stage as the world ventures into hitherto unexplored terrain.
CHAPTER 11
An Epilogue
We have covered a wide range of space and time in the course of our explorations—from classical Rome and Greece to modern Israel and Chile, with all sorts of stops in between. Although we have explored only a few episodes in detail, we have touched indirectly on many others.
I trust that my readers have been impressed, as I have been after nearly half a century of close study of monetary phenomena, with the universal role that money plays, the wide applicability of a few relatively simple propositions about money, and yet the difficulty that the public at large and even the monetary authorities have in understanding and applying those propositions. Georges Clemenceau,