Money Mischief_ Episodes in Monetary History - Milton Friedman [99]
Money is so crucial an element in the economy, yet also largely an invisible one, that even what appear to be insignificant changes in the monetary structure can have far-reaching and unanticipated effects. Leaving out a single line from a law, as in the Coinage Act of 1873, can bedevil—indeed, come close to shaping—a nation's politics and economy for decades. Inventors in Scotland and miners in South Africa can write finis to the political career of a rising star in the United States. Appeasing a small group of influential legislators in the United States can have an effect on whether China ends up as a communist state. The same monetary decision made by two different countries can have opposite results because the decisions are made six years apart—a disaster in one case, a triumph in the other. A change in the monetary regime can set the world sailing on uncharted monetary seas for more than a decade of instability and turbulence before matters start to settle down, but still without any agreed on and trustworthy map to the future course of the monetary voyage. And the litany could be extended far beyond the episodes touched on in this book.
Perhaps the single most important and most thoroughly documented yet obstinately rejected proposition is that "inflation is always and everywhere a monetary phenomenon."* That proposition has been known by some scholars and men of affairs for hundreds, if not thousands, of years. Yet it has not prevented governmental authorities from yielding to the temptation to mulct their subjects by debasing their money—taxation without representation—while vigorously denying that they are doing anything of the kind and attributing the resulting inflation to all sorts of other devils incarnate.
Nor is this ancient history. One need go back no further than the 1970s in the United States and other advanced countries. Yielding to that temptation is the source of the current desperate straits of Argentina, Brazil, Nicaragua, and a number of other Latin American states. The most recent full-fledged hyperinflation was in Bolivia, which fortunately has now reformed its monetary system, though not without paying a high price in lost production, misery, and lowered living standards. And I suspect that the world will see more episodes of both high inflation and full-fledged hyperinflation within the next few decades.
Rapid increases in the quantity of money produce inflation. Sharp decreases produce depression. That is an equally well documented proposition. It is not directly documented in this book, though some episodes of it are referred to: the 1873–79 depression in the United States, the depressed years of the early 1890s, the great contraction of 1929—33 that brought Franklin Delano Roosevelt to the White House and set the stage for the silver purchase program of the 1930s.
Why are these and similarly well documented propositions about money so often neglected in shaping policy? One reason is the contrast between the way things appear to the individual and the way they are to the community. If you go to the market to buy some strawberries, you will be able to buy as many as you wish at the posted price, subject only to the dealer's stock. To you, the price is fixed, the quantity variable. But suppose everyone suddenly got a yen for strawberries. For the community at large, the total amount of strawberries available at a given time is a fixed amount. A sudden increase in the quantity demanded at the initial price could be met only by a rise in price sufficient to reduce the quantity demanded to the amount available. For the community at large, the quantity is fixed, the price variable—just the opposite of what is true for the individual.
Such a contrast is true of most things. In the area of