Sep 8, 2011

A great honor!

## The Limping Middle Class

September 3, 2011

# The Limping Middle Class

Robert B. Reich is the former secretary of labor, a professor at the University of California, Berkeley, and the author of “Aftershock: The Next Economy and America’s Future.”

THE 5 percent of Americans with the highest incomes now account for 37 percent of all consumer purchases, according to the latest research from Moody’s Analytics. That should come as no surprise. Our society has become more and more unequal.

When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we’ve seen, ends badly. An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations. Sound familiar?

The economy won’t really bounce back until America’s surge toward inequality is reversed. Even if by some miracle President Obama gets support for a second big stimulus while Ben S. Bernanke’s Fed keeps interest rates near zero, neither will do the trick without a middle class capable of spending. Pump-priming works only when a well contains enough water.

Look back over the last hundred years and you’ll see the pattern. During periods when the very rich took home a much smaller proportion of total income — as in the Great Prosperity between 1947 and 1977 — the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.

During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Starting in the late 1970s, the middle class began to weaken. Although productivity continued to grow and the economy continued to expand, wages began flattening in the 1970s because new technologies — container ships, satellite communications, eventually computers and the Internet — started to undermine any American job that could be automated or done more cheaply abroad. The same technologies bestowed ever larger rewards on people who could use them to innovate and solve problems. Some were product entrepreneurs; a growing number were financial entrepreneurs. The pay of graduates of prestigious colleges and M.B.A. programs — the “talent” who reached the pinnacles of power in executive suites and on Wall Street — soared.

The middle class nonetheless continued to spend, at first enabled by the flow of women into the work force. (In the 1960s only 12 percent of married women with young children were working for pay; by the late 1990s, 55 percent were.) When that way of life stopped generating enough income, Americans went deeper into debt. From the late 1990s to 2007, the typical household debt grew by a third. As long as housing values continued to rise it seemed a painless way to get additional money.

Eventually, of course, the bubble burst. That ended the middle class’s remarkable ability to keep spending in the face of near stagnant wages. The puzzle is why so little has been done in the last 40 years to help deal with the subversion of the economic power of the middle class. With the continued gains from economic growth, the nation could have enabled more people to become problem solvers and innovators — through early childhood education, better public schools, expanded access to higher education and more efficient public transportation.

We might have enlarged safety nets — by having unemployment insurance cover part-time work, by giving transition assistance to move to new jobs in new locations, by creating insurance for communities that lost a major employer. And we could have made Medicare available to anyone.

Big companies could have been required to pay severance to American workers they let go and train them for new jobs. The minimum wage could have been pegged at half the median wage, and we could have insisted that the foreign nations we trade with do the same, so that all citizens could share in gains from trade.

We could have raised taxes on the rich and cut them for poorer Americans.

But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatized. It cut spending on infrastructure as a percentage of the national economy and shifted more of the costs of public higher education to families. It shredded safety nets. (Only 27 percent of the unemployed are covered by unemployment insurance.) And it allowed companies to bust unions and threaten employees who tried to organize. Fewer than 8 percent of private-sector workers are unionized.

More generally, it stood by as big American companies became global companies with no more loyalty to the United States than a GPS satellite. Meanwhile, the top income tax rate was halved to 35 percent and many of the nation’s richest were allowed to treat their income as capital gains subject to no more than 15 percent tax. Inheritance taxes that affected only the topmost 1.5 percent of earners were sliced. Yet at the same time sales and payroll taxes — both taking a bigger chunk out of modest paychecks — were increased.

Most telling of all, Washington deregulated Wall Street while insuring it against major losses. In so doing, it allowed finance — which until then had been the servant of American industry — to become its master, demanding short-term profits over long-term growth and raking in an ever larger portion of the nation’s profits. By 2007, financial companies accounted for over 40 percent of American corporate profits and almost as great a percentage of pay, up from 10 percent during the Great Prosperity.

Some say the regressive lurch occurred because Americans lost confidence in government. But this argument has cause and effect backward. The tax revolts that thundered across America starting in the late 1970s were not so much ideological revolts against government — Americans still wanted all the government services they had before, and then some — as against paying more taxes on incomes that had stagnated. Inevitably, government services deteriorated and government deficits exploded, confirming the public’s growing cynicism about government’s doing anything right.

Some say we couldn’t have reversed the consequences of globalization and technological change. Yet the experiences of other nations, like Germany, suggest otherwise. Germany has grown faster than the United States for the last 15 years, and the gains have been more widely spread. While Americans’ average hourly pay has risen only 6 percent since 1985, adjusted for inflation, German workers’ pay has risen almost 30 percent. At the same time, the top 1 percent of German households now take home about 11 percent of all income — about the same as in 1970. And although in the last months Germany has been hit by the debt crisis of its neighbors, its unemployment is still below where it was when the financial crisis started in 2007.

How has Germany done it? Mainly by focusing like a laser on education (German math scores continue to extend their lead over American), and by maintaining strong labor unions.

THE real reason for America’s Great Regression was political. As income and wealth became more concentrated in fewer hands, American politics reverted to what Marriner S. Eccles, a former chairman of the Federal Reserve, described in the 1920s, when people “with great economic power had an undue influence in making the rules of the economic game.” With hefty campaign contributions and platoons of lobbyists and public relations spinners, America’s executive class has gained lower tax rates while resisting reforms that would spread the gains from growth.

Yet the rich are now being bitten by their own success. Those at the top would be better off with a smaller share of a rapidly growing economy than a large share of one that’s almost dead in the water.

The economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America’s vast middle class. The spending of the richest 5 percent alone will not lead to a virtuous cycle of more jobs and higher living standards. Nor can we rely on exports to fill the gap. It is impossible for every large economy, including the United States, to become a net exporter.

Reviving the middle class requires that we reverse the nation’s decades-long trend toward widening inequality. This is possible notwithstanding the political power of the executive class. So many people are now being hit by job losses, sagging incomes and declining home values that Americans could be mobilized.

Moreover, an economy is not a zero-sum game. Even the executive class has an enlightened self-interest in reversing the trend; just as a rising tide lifts all boats, the ebbing tide is now threatening to beach many of the yachts. The question is whether, and when, we will summon the political will. We have summoned it before in even bleaker times.

As the historian James Truslow Adams defined the American Dream when he coined the term at the depths of the Great Depression, what we seek is “a land in which life should be better and richer and fuller for everyone.”

That dream is still within our grasp.

## Companies and information: The leaky corporation | The Economist

The leaky corporation

IN EARLY February Hewlett-Packard showed off its new tablet computer, which it hopes will be a rival to Apple’s iPad. The event was less exciting than it might have been, thanks to the leaking of the design in mid-January. Other technology companies have suffered similar embarrassments lately. Dell’s timetable for bringing tablets to market appeared on a tech-news website. A schedule for new products from NVIDIA, which makes graphics chips, also seeped out.

Geeks aren’t the only ones who can’t keep a secret. In January it emerged that Renault had suspended three senior executives, allegedly for passing on blueprints for electric cars (which the executives deny). An American radio show has claimed to have found the recipe for Coca-Cola’s secret ingredient in an old newspaper photograph. Facebook’s corporate privacy settings went awry when some of the social network’s finances were published. A strategy document from AOL came to light, revealing that the internet and media firm’s journalists were expected to write five to ten articles a day.

Meanwhile, Julian Assange has been doing his best to make bankers sweat. In November the founder of WikiLeaks promised a “megaleak” early in 2011. He was said to be in possession of a hard drive from the laptop of a former executive of an unnamed American bank, containing documents even more toxic than the copiously leaked diplomatic cables from the State Department. They would reveal an “ecosystem of corruption” and “take down a bank or two”.

“I think it’s great,” Mr Assange said in a television interview in January. “We have all these banks squirming, thinking maybe it’s them.” At Bank of America (BofA), widely thought to be the bank in question, an internal investigation began. Had any laptop gone missing? What could be on its hard drive? And how should BofA react if, say, compromising e-mails were leaked?

The bank’s bosses and investigators can relax a bit. Recent reports say that Mr Assange has acknowledged in private that the material may be less revealing than he had suggested. Financial experts would be needed to determine whether any of it was at all newsworthy.

Even so, the WikiLeaks threat and the persistent leaking of other supposedly confidential corporate information have brought an important issue to the fore. Companies are creating an ever-growing pile of digital information, from product designs to employees’ e-mails. Keeping tabs on it all is increasingly hard, not only because there is so much of it but also because of the ease of storing and sending it. Much of this information would do little damage if it seeped into the outside world; some of it, indeed, might well do some good. But some could also be valuable to competitors—or simply embarrassing—and needs to be protected. Companies therefore have to decide what they should try to keep to themselves and how best to secure it.

Trying to prevent leaks by employees or to fight off hackers only helps so much. Powerful forces are pushing companies to become more transparent. Technology is turning the firm, long a safe box for information, into something more like a sieve, unable to contain all its data. Furthermore, transparency can bring huge benefits. “The end result will be more openness,” predicts Bruce Schneier, a data-security guru.

From safe to sieve

When corporate information lived only on paper, which was complemented by microfilm about 50 years ago, it was much easier to manage and protect than it is today. Accountants and archivists classified it; the most secret documents were put in a safe. Copying was difficult: it would have taken Bradley Manning, the soldier who is alleged to have sent the diplomatic cables to WikiLeaks, years to photograph or smuggle out all the 250,000 documents he is said to have downloaded—assuming that he was not detected.

Things did not change much when computers first made an appearance in firms. They were used mostly for accounting or other transactions, known as “structured information”. And they were self-contained systems to which few people had access. Even the introduction in the 1980s of more decentralised information-technology (IT) systems and personal computers (PCs) did not make much of a difference. PCs served at first as glorified typewriters.

It was only with the advent of the internet and its corporate counterpart, the intranet, that information began to flow more quickly. Employees had access to lots more data and could exchange electronic messages with the outer world. PCs became a receptacle for huge amounts of “unstructured information”, such as text files and presentations. The banker’s hard drive in Mr Assange’s possession is rumoured to contain several years’ worth of e-mails and attachments.

Now an even more important change is taking place. So far firms have spent their IT budgets mostly on what Geoffrey Moore of TCG Advisors, a firm of consultants, calls “systems of record”, which track the flow of money, products and people within a company and, more recently, its network of suppliers. Now, he says, firms are increasingly investing in “systems of engagement”. By this he means all kinds of technologies that digitise, speed up and automate a firm’s interaction with the outer world.

Mobile devices, video conferencing and online chat are the most obvious examples of these technologies: they allow instant communication. But they are only part of the picture, says Mr Moore. Equally important are a growing number of tools that enable new forms of collaboration: employees collectively edit online documents, called wikis; web-conferencing services help firms and their customers to design products together; and smartphone applications let companies collect information about people’s likes and dislikes and hence about market trends.

It is easy to see how such services will produce ever more data. They are one reason why IDC, a market-research firm, predicts that the “digital universe”, the amount of digital information created and replicated in a year, will increase to 35 zettabytes by 2020, from less than 1 zettabyte in 2009 (see chart); 1 zettabyte is 1 trillion gigabytes, or the equivalent of 250 billion DVDs. But these tools will also make a firm’s borders ever more porous. “WikiLeaks is just a reflection of the problem that more and more data are produced and can leak out,” says John Mancini, president of AIIM, an organisation dedicated to improving information management.

Two other developments are also poking holes in companies’ digital firewalls. One is outsourcing: contractors often need to be connected to their clients’ computer systems. The other is employees’ own gadgets. Younger staff, especially, who are attuned to easy-to-use consumer technology, want to bring their own gear to work. “They don’t like to use a boring corporate BlackBerry,” explains Mr Mancini.

The data drain

As a result, more and more data are seeping out of companies, even of the sort that should be well protected. When Eric Johnson of the Tuck School of Business at Dartmouth College and his fellow researchers went through popular file-sharing services last year, they found files that contained health-related information as well as names, addresses and dates of birth. In many cases, explains Mr Johnson, the reason for such leaks is not malice or even recklessness, but that corporate applications are often difficult to use, in particular in health care. To be able to work better with data, employees often transfer them into spreadsheets and other types of files that are easier to manipulate—but also easier to lose control of.

Although most leaks are not deliberate, many are. Renault, for example, claims to be a victim of industrial espionage. In a prominent insider-trading case in the United States, some hedge-fund managers are accused of having benefited from data leaked from Taiwanese semiconductor foundries, including spreadsheets showing the orders and thus the sales expectations of their customers.

Not surprisingly, therefore, companies feel a growing urge to prevent leaks. The pressure is regulatory as well as commercial. Stricter data-protection and other rules are also pushing firms to keep a closer watch on information. In America, for instance, the Health Insurance Portability and Accountability Act (HIPAA) introduced security standards for personal health data. In lawsuits companies must be able to produce all relevant digital information in court. No wonder that some executives have taken to using e-mail sparingly or not at all. Whole companies, however, cannot dodge the digital flow.

To help them plug the holes, companies are being offered special types of software. One is called “content management”. Programs sold by Alfresco, EMC Documentum and others let firms keep tabs on their digital content, classify it and define who has access to it. A junior salesman, for instance, will not be able to see the latest financial results before publication—and thus cannot send them to a friend.

Another type, in which Symantec and Websense are the market leaders, is “data loss prevention” (DLP). This is software that sits at the edge of a firm’s network and inspects the outgoing data traffic. If it detects sensitive information, it sounds the alarm and can block the incriminating bits. The software is often used to prevent social-security and credit-card numbers from leaving a company—and thus make it comply with HIPAA and similar regulations.

A third field, newer than the first two, is “network forensics”. The idea is to keep an eye on everything that is happening in a corporate network, and thus to detect a leaker. NetWitness, a start-up company, says that its software records all the digital goings-on and then looks for suspicious patterns, creating “real-time situation awareness”, in the words of Edward Schwartz, its chief security officer.

There are also any number of more exotic approaches. Autonomy, a British software firm, offers “bells in the dark”. False records—made-up pieces of e-mail, say—are spread around the network. Because they are false, no one should gain access to them. If somebody does, an alarm is triggered, as a burglar might set off an alarm breaking into a house at night.

These programs deter some leakers and keep employees from doing stupid things. But reality rarely matches the marketing. Content-management programs are hard to use and rarely fully implemented. Role-based access control sounds fine in theory but is difficult in practice. Firms often do not know exactly what access should be assigned to whom. Even if they do, jobs tend to change quickly. A field study of an investment bank by Mr Johnson and his colleagues found that one department of 3,000 employees saw 1,000 organisational changes within only a few months.

This leads to what Mr Johnson calls “over-entitlement”. So that workers can get their jobs done, they are given access to more information than they really need. At the investment bank, more than 50% were over-entitled. Because access is rarely revoked, over time employees gain the right to see more and more. In some companies, Mr Johnson was able to predict a worker’s length of employment from how much access he had. But he adds that if role-based access control is enforced too strictly, employees have too little data to do their jobs.

Similarly, DLP is no guarantee against leaks: because it cannot tell what is in encrypted files, data can be wrapped up and smuggled out. Network forensics can certainly show what is happening in a small group of people working on a top-secret product. But it is hard to see how it can keep track of the ever-growing traffic that passes through or leaves big corporate IT systems, for instance through a simple memory stick (which plugs into a PC and can hold the equivalent of dozens of feature-length films). “Technology can’t solve the problem, just lower the probability of accidents,” explains John Stewart, the chief security officer of Cisco, a maker of networking equipment.

Other experts point out that companies face a fundamental difficulty. There is a tension in handling large amounts of data that can be seen by many people, argues Ross Anderson, of Cambridge University. If a system lets a few people do only very simple things—such as checking whether a product is available—the risks can be managed; but if it lets a lot of people do general inquiries it becomes insecure. SIPRNet, where the American diplomatic cables given to WikiLeaks had been stored, is a case in point: it provided generous access to several hundred thousand people.

In the corporate world, to limit the channels through which data can escape, some companies do not allow employees to bring their own gear to work or to use memory sticks or certain online services. Although firms have probably become more permissive since, a survey by Robert Half Technology, a recruitment agency, found in 2009 that more than half of chief information officers in America blocked the use of sites such as Facebook at work.

Yet this approach comes at a price, and not only because it makes a firm less attractive to Facebook-using, iPhone-toting youngsters. “More openness also creates trust,” argues Jeff Jarvis, a new-media sage who is writing a book about the virtues of transparency, entitled “Public Parts”. Dell, he says, gained a lot of goodwill when it started talking openly about its products’ technical problems, such as exploding laptop batteries. “If you open the kimono, a lot of good things happen,” says Don Tapscott, a management consultant and author: it keeps the company honest, creates more loyalty among employees and lowers transaction costs with suppliers.

More important still, if the McKinsey Global Institute, the research arm of a consulting firm, has its numbers right, limiting the adoption of systems of engagement can hurt profits. In a recent survey it found that firms that made extensive use of social networks, wikis and so forth reaped important benefits, including faster decision-making and increased innovation.

How then to strike the right balance between secrecy and transparency? It may be useful to think of a computer network as being like a system of roads. Just like accidents, leaks are bound to happen and attempts to stop the traffic will fail, says Mr Schneier, the security expert. The best way to start reducing accidents may not be employing more technology but making sure that staff understand the rules of the road—and its dangers. Transferring files onto a home PC, for instance, can be a recipe for disaster. It may explain how health data have found their way onto file-sharing networks. If a member of the employee’s family has joined such a network, the data can be replicated on many other computers.

Don’t do that again

Companies also have to set the right incentives. To avoid the problems of role-based access control, Mr Johnson proposes a system akin to a speed trap: it allows users to gain access to more data easily, but records what they do and hands out penalties if they abuse the privilege. He reports that Intel, the world’s largest chipmaker, issues “speeding tickets” to employees who break its rules.

Mr Johnson is the first to admit that this approach is too risky for data that are very valuable or the release of which could cause a lot of damage. But most companies do not even realise what kind of information they have and how valuable or sensitive it is. “They are often trying to protect everything instead of concentrating on the important stuff,” reports John Newton, the chief technology officer of Alfresco.

The “WikiLeaks incident is an opportunity to improve information governance,” wrote Debra Logan, an analyst at Gartner, a research firm, and her colleagues in a recent note. A first step is to decide which data should be kept and for how long; many firms store too much, making leaks more likely. In a second round, says Ms Logan, companies must classify information according to how sensitive it is. “Only then can you have an intelligent discussion about what to protect and what to do when something gets leaked.”

Such an exercise could also be an occasion to develop what Mr Tapscott calls a “transparency strategy”: how closed or open an organisation wants to be. The answer depends on the business it is in. For companies such as Accenture, an IT consultancy and outsourcing firm, security is a priority from the top down because it is dealing with a lot of customer data, says Alastair MacWillson, who runs its security business. Employees must undergo security training regularly. As far as possible, software should control what leaves the company’s network. “If you try to do something with your BlackBerry or your laptop that you should not do,” explains Mr MacWillson, “the system will ask you: ‘Should you really be doing this?’”

At the other end of the scale is the Mozilla Foundation, which leads the development of Firefox, an open-source browser. Transparency is not just a natural inclination but a necessity, says Mitchell Baker, who chairs the foundation. If Mozilla kept its cards close to the chest, its global community of developers would not and could not help write the program. So it keeps secrets to a minimum: employees’ personal information, data that business partners do not want made public and security issues in its software. Everything else can be found somewhere on Mozilla’s many websites. And anyone can take part in its weekly conference calls.

Few companies will go that far. But many will move in this direction. The transparency strategy of Best Buy, an electronics retailer, is that its customers should know as much as its employees. Twitter tells its employees that they can tweet about anything, but that they should not do “stupid things”. In the digital era of exploding quantities of data that are increasingly hard to contain within companies’ systems, more companies are likely to become more transparent. Mr Tapscott and Richard Hunter, another technology savant, may not have been exaggerating much a decade ago, when they wrote books foreseeing “The Naked Corporation” and a “World Without Secrets”.

## It's the Inequality, Stupid | Mother Jones

Eleven charts that explain everything that's wrong with America.

member max. est. net worth
Rep. Darrell Issa (R-Calif.) $451.1 million Rep. Jane Harman (D-Calif.)$435.4 million
Rep. Vern Buchanan (R-Fla.) $366.2 million Sen. John Kerry (D-Mass.)$294.9 million
Rep. Jared Polis (D-Colo.) $285.1 million Sen. Mark Warner (D-Va.)$283.1 million
Sen. Herb Kohl (D-Wisc.) $231.2 million Rep. Michael McCaul (R-Texas)$201.5 million
Sen. Jay Rockefeller (D-W.Va.) $136.2 million Sen. Dianne Feinstein (D-Calif.)$108.1 million
combined net worth: $2.8 billion Congressional data from 2009. Family net worth data from 2007. Sources: Center for Responsive Politics; US Census; Edward Wolff, Bard College. Sources Income distribution: Emmanuel Saez (Excel) Net worth: Edward Wolff (PDF) Household income/income share: Congressional Budget Office Real vs. desired distribution of wealth: Michael I. Norton and Dan Ariely (PDF) Net worth of Americans vs. Congress: Federal Reserve (average); Center for Responsive Politics (Congress) Your chances of being a millionaire: Calculation based on data from Wolff (PDF); US Census (household and population data) Member of Congress' chances: Center for Responsive Politics Wealthiest members of Congress: Center for Responsive Politics Tax cut votes: New York Times (Senate; House) Wall street profits, 2007-2009: New York State Comptroller (PDF) Unemployment rate, 2007-2009: Bureau of Labor Statistics Home equity, 2007-2009: Federal Reserve, Flow of Funds data, 1995-2004 and 2005-2009 (PDFs) CEO vs. worker pay: Economic Policy Institute Historic tax rates: Calculations based on data from The Tax Foundation Federal tax revenue: Joint Committee on Taxation (PDF) More Mother Jones charty goodness: How the rich get richer; how the poor get poorer; who owns Congress? Dave Gilson is a senior editor at Mother Jones. Read more of his stories, follow him on Twitter, or contact him at dgilson (at) motherjones (dot) com. Get Dave Gilson's RSS feed. ## Trickle Down economics was a Trojan Horse David Stockman In the 1980’s Ronald Reagan ushered in a new era in American economics as he cut the top tax bracket from 70% down to 50% and then down again to 28%. In order to get support for doing this from the people, and also from politicians, a very crafty set of lies were produced. As David Stockman, then Reagan’s budget director, put it: giving small tax cuts across the board to all brackets was simply a “Trojan Horse” that was used to get approval for the huge top tax bracket cuts. “Trickle-Down” was a term used by Republicans that meant giving tax cuts to the rich. Stockman explains that: "It's kind of hard to sell 'trickle down,' so the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory." "Yes, Stockman conceded, when one stripped away the new rhetoric emphasizing across-the-board cuts, the supply-side theory was really new clothes for the unpopular doctrine of the old Republican orthodoxy." "…the Reagan coalition prevailed again in the House and Congress passed the tax-cut legislation with a final frenzy of trading and bargaining. Again, Stockman was not exhilarated by the victory. On the contrary, it seemed to leave a bad taste in his mouth, as though the democratic process had finally succeeded in shocking him by its intensity and its greed. Once again, Stockman participated in the trading -- special tax concessions for oil -- lease holders and real-estate tax shelters, and generous loopholes that virtually eliminated the corporate income tax. Stockman sat in the room and saw it happen." "'Do you realize the greed that came to the forefront?' Stockman asked with wonder. 'The hogs were really feeding. The greed level, the level of opportunism, just got out of control.'" The Education of David Stockman 1981: http://www. theatlantic. com/politics/budget/stockman.htm Reagan's policies did more than simply cut income taxes. A large number of tax loopholes were written into the tax code that catered to special corporate interests. In fact many of the current scandals involving companies such as Enron are rooted in laws that were passed during the Reagan administration that gave these companies more legal legroom to work with and less oversight. In addition, the small “income-tax cuts” that were given to the middle and lower income tax brackets were countered with new taxes that were directed at middle and low income individuals, as former House Speaker Jim Wright said: Reagan's tax increases fell mainly on consumers, low- and middle-income people. Sales and excise levies. Reagan didn't call these taxes. They were, in his euphemistic lexicon, "user fees" and "revenue-enhancers." The most important issue though is that even if you take the Reagan “Trickle-Down” policy at face value it’s still horribly flawed as a policy that will provide economic growth that benefits all Americans. There is no realistic way for "Trickle-Down" economics to work to increase the income of the working classes of America. In fact I am certain that the developers of the theory of "Trickle-Down" economics were fully aware of this and that "Trickle-Down" has in fact worked as intended. This means that the intent behind implementing "Trickle-Down" was to benefit the wealthiest Americans at the expense of working class Americans. "Trickle-Down" hasn't failed, as many modern economists have suggested, it has succeeded in its goals, which is the increase of economic inequality and the shift of a greater portion of America's wealth into the hands of the wealthiest Americans. I'll show you exactly why "Trickle-Down" can never really trickle down, and I'll expose the logic that was used to trick Americans into supporting the idea that freeing up money for the wealthy could somehow benefit the poor and middle class. I'm going to use a very simplistic example to demonstrate the principles of "Trickle-Down" economics. No, this is not a 100% accurate model of our economic system, and it assumes that "all other aspects of the economy are equal," but the major principles are represented. I will give "Trickle-Down" the benefit of the doubt and assume that it actually does create jobs in my example. We have a room with 5 people in it. The total value of all the money in the room is$10. 00. The money is apportioned as in the table below.

 Total Value $10. 00 Jim$4. 00 40% Susan $3. 00 30% Tom$2. 00 20% Amy $1. 00 10% Bill$0. 00 0%

Sam enters the room and says that he has $10. 00 that he wants to give to Jim. This makes everyone else unhappy of course and everyone says that they will beat Jim up if he takes the money. Sam then proposes a solution. He says that if everyone allows him to give Jim$6. 00 he will give $1. 00 to everyone else in the room. This sounds pretty good to everyone so they agree to let Jim receive the money. So, after Jim gets the money and everyone gets a dollar this is what the monetary breakdown of the room looks like:  Total Value$20. 00 Jim $10. 00 50% Susan$4. 00 20% Tom $3. 00 15% Amy$2. 00 10% Bill $1. 00 5% As you can see, due to inflation most of the other people in the room either lost value or saw no real gain. As you can also see the size of the "economy" did in fact grow as the theory of "Trickle-Down" proposes, but the growth only benefited one person, Jim, and arguably Bill. Even though the economy grew overall most of the people in the room saw a loss of value. This is because the value of money is relative. It's relative to many factors, but one is how much money is in the system. If you have 1 dollar out of 10 then its worth more than 1 dollar out of 1,000. How wealthy you are in terms of dollars is not measured by the number of dollars you have, it is measured by the share of dollars that you have out of the total number of dollars in the system. Now, your opinion of Sam and Jim can be one of only two options. 1) Jim and Sam were naive and actually thought that they were going to be helping everyone with their actions; the fact that the actions had a negative effect on everyone else was an accident. 2) Jim and Sam knew that taking the$10. 00, keeping $6. 00 of it, and giving$1. 00 to everyone else wasn't going to help anyone but Jim, and they tricked everyone for the purpose of self gain using the $1. 00 "gift" to the under-classes as a "Trojan Horse" to support the action. As in the example above there are three basic possibilities for economic growth (and many variations in between): Either the growth of the economy can be spread equally among everyone, the growth of the economy can be shifted towards the bottom of the population in which case the poor see a rise in relative value, becoming "less poor," or the growth can be shifted toward the top in which case the rich see a rise in relative value, becoming "more rich. " The general economic policy of "Trickle-Down" that was put in place by Reagan has gone fundamentally unchanged since it was adopted by the country in the 1980s. The claim of Reagan was that "all boats would rise" by giving huge tax cuts for the wealthy. This did not happen. The majority of boats stayed the same or sank, while only between 5% and 1% of the boats actually rose. The effects of "Trickle-Down" policy are evident. As would be expected from the policy, the largest beneficiaries of the "Trickle-Down" system have been the wealthy. Individual earnings inequality as reported by the U. S. Census Bureau was falling or stable from the 1960s through the 1970s, however, beginning in the 1980s, along with the economic reforms of "Trickle-Down" policy, income inequality began to rise and has continued to rise dramatically ever since, as shown in the figure below. (Data for the graphs below comes from the US Census Bureau) Although there was a huge increase in real income for average Americans between World War II and the 1970s the income of the average American male has gone essentially unchanged since 1970 as the figure below indicates. Income for females though has continued to rise. What is significant about this graph is that between 1980 and present (2003) the incomes of the top 2% of American wage earners has gone up dramatically despite the stagnation of the income of average Americans. This graph shows both average hourly earnings and the minimum wage together in 2001 dollars. As you can see both the minimum wage and average hourly earnings reached their peak in the 1960s and 1970s. This graph does not go back any farther than 1960, but for all practical purposes the peak shown here in 1973 is the historical peak for hourly earnings in America. See the source data in the link below for details on hourly earnings. As we can see below, the percentage of people in poverty who are also working full time has gone up steadily since the 1970s, and it also underscores an important point, as all of these graphs do, which is that the fundamental economic policy of the Reagan administration has gone essentially unchanged, even by President Clinton. Today we are still operating under a Supply Side economic model. In fact, even though the average income tax rate paid in America today is roughly the same as it was in 1979, the average income tax rate for the top 1% is less than it was in 1979. The graph below shows the actual percentage of income paid to all (Income, Social Security, Corporate, Capital gains, and Excise) Federal taxes per the various groups. During the Regan era, you can see that total Federal taxes on the lowest income groups actually went up. Clinton continued to maintain the Supply Side model that was established under Reagan. By 2000 the Top 1% still maintained significantly lower taxes compared to the pre-Reagan era, but taxes on "upper middle class" earners had increased and taxes on the middle class have stayed about the same as they were just prior to Reagan's entry into office, which is higher than they ever were prior to the 1970s. As the figures below indicate, the degree of increase in income for the wealthiest Americans has far outpaced the majority of the population, a trend that also started with the Reagan Presidency. A large factor in this increase for the top 2% has been capital gains. The two graphs above show similar data, but there are some important differences. Obviously the first graph shows a wider range of data in terms of the years that it covers, but the first graph also shows the data for total household incomes, which have increased among the bottom quintiles in large part because of the increase in two or three worker households, but the bottom graph shows the data adjusted for household size. In addition the bottom graph obviously also shows data for the top 1%, whereas the top graph does not, and, perhaps most significantly, the bottom graph shows after tax income, so it is showing what was taken home after all federal taxes were paid. This next graph shows an even longer range view. This shows after tax income in 2000 dollars going back to 1913 for the top 1% and the average for the remaining bottom 99%. After World War II significant efforts were made to ensure prosperity for all Americans. These efforts dramatically reduced poverty rates and helped to build the strong middle-class that America has become famous for. However, as the graph below shows, significant changes began with the Reagan presidency. Between 1965 and 2001 the number of multi-worker households has increased dramatically. In fact the slight increase in income that is shown for the 1st through 4th quintiles in the graph titled Average Household Income by Quintile (a quintile represents 1/5th of the population) is primarily attributed to an increase in the number of households with two or more workers supporting the household. Individual male income for the 1st through 4th quintiles has actually gone down or stayed the same since the 1980s when adjusted for inflation. In 1965 27% of the full time workforce was female, by 2001 that number had risen to 41%. What has allowed the average American household to continue to maintain a good standard of living is an increase in multi-worker households and a decrease in the number of children that families have, as well as a large increase in the trade deficit, with increasing numbers of American goods being made in third world countries. The issue is that the economic policies of the Reagan administration were designed to primarily benefit wealthy Americans. At the time a lot of smoke and mirrors were used to convince average Americans that these policies would help them as well. A similar set of lies has been used by those, like Steve Forbes, who promote a flat tax system. What the "Trickle-Down"/Supply Side policies of the Reagan administration were designed to do was to increase the amount of money available to wealthy Americans for investing and developing businesses. This was intended to create an increase in production of products and services and hence and increase in new jobs. The reason that the policy is called Supply Side, is because the supply of goods increases before there is a demand for goods. So, in that case, the supply of goods is intended to then spark demand, resulting in economic growth. This use of Supply Side policy led to a huge increase in consumerism and the use of credit. An environment of consumerism was created in American society through the media via advertisements, movies, and television shows, etc. that promoted consumerism. Consumers though, did not have the money to fulfill the desires created by society so debt was used to participate in the economy. Restrictions on credit were loosened under the Reagan administration making it easier for individuals to gain credit lines because the use of credit was essential to growing the economy because real wages were not going up for the average American, yet it was essential that the average American increase spending in order to fuel the economy. This situation fueled female entry into the workforce as more households require two workers to maintain their standard of living. The result of this is that American household debt has been constantly hitting new highs since the 1980s as can be seen in the graph below provided by Michael Hodges. The truth is that "Trickle-Down" was never intended to help middle income and poor Americans; it was intended to help the wealthy and Corporate America. The economic policies of the Reagan era increased the trade deficit and provided easier ways for companies to "hide" money. 1980 the top 1% of tax filers received 8. 45% of American AGI (Adjusted Gross Income) and in 2000 that figure had risen to 20. 81% of the national AGI. Today the over 50% of the national income goes to the wealthiest 20% of Americans. This is the first time since 1935 that such a large portion of the national income has gone to such a small portion of the population. In 1967 the wealthiest 20% only accounted for 43% of the nation's income. The trend began in 1982. Between 1967 and 1982 middle-income households were gaining a larger share of the economy. What this means is that between 1982 and 2001 the bottom 80% of Americans have lost share in the nation's economy. This was the inevitable result of Reaganomics. It was an intended result. Political control and economic control go hand in hand. If the control of the economy is not in the hands of the majority of Americans then neither is political control. For more on taxation and income in America see: In Depth Analysis of American Income and Taxation This page is a part of This War Is About So Much More which was written in March and April of 2003. This document should be read in the order that it is presented. If you are coming to this page from an outside source, such as a search engine, and you are interested in how this information relates to Operation Iraqi Freedom, then please start at the Foreword. In addition, if you have been directed here from an outside search engine then you may want to re-search this website with the same criteria because it is likely that this website contains additional information on the same topics. rationalrevolution.net has had page views since January 21, 2004  Copyright © 2003 - 2007 Website Launched: 5/22/2003 Last Updated: 10/20/2007 Contact: gp@rationalrevolution.net ## Why the rioters should be reading Rousseau August 16, 2011 6:49 pm # Why the rioters should be reading Rousseau Britain has experienced two crises this August, one on the streets and one in the markets. The French philosopher Jean-Jacques Rousseau perceived the common issue three centuries ago. The gangs he observed were not on the city streets or trading floors, they were huntsmen: “If a deer was to be taken, everyone saw that, in order to succeed, he must abide faithfully by his post: but if a hare happened to come within the reach of any one of them, it is not to be doubted that he pursued it without scruple, and, having seized his prey, cared very little, if by so doing he caused his companions to miss theirs.” Rousseau was an early and incisive critic of the idea that self-interested behaviour would necessarily work to the benefit of all. If the hunt were to catch a deer, it would need to establish shared values, and probably impose them through some sort of hierarchy. Without such a structure, there would be no more for supper than the occasional hare. It is unlikely that the people who introduced the concept of “eat what you kill” into modern professional services had read Rousseau. Nor – it is safe to say – had the people who snatched electrical goods from the broken shop windows of Tottenham. Two broad economic theories describe the allocation of income and wealth. The power theory states, broadly, that people get what they grab: from the forest, the markets, or the shop window. The distribution of income reflects the distribution of power. For most of history, this was plainly true – the landlord took what he could from the tenant, the baron what he could from the landlord, and the king what he could from everyone. The sixth Duke of Muck was rich because the first Duke of Muck had been an especially successful gang leader. The alternative theory is that what people earn reflects their marginal productivity – how much they personally add to the value of goods and services. The marginal productivity theory has many attractions, especially to those who are well paid: if what they receive is a product of their own efforts, their rewards are surely well deserved. Collaborative organisation was only occasionally necessary in an agricultural society in which there were no asset-backed securities and no electrical goods in the shops. But in a complex modern economy, as in the deer forest, production requires the involvement of many. Adam Smith marvelled at the resulting efficiency in his description of a pin factory. But if, as Smith described, one man wrought the iron and another stretched it, who could say what was the marginal productivity of each? And what was the marginal product of the chief executive of the pin factory, or the person who hedged the foreign exchange exposure on the unfinished pins, whose contributions the Scots savant unaccountably failed to mention? If the pin factory really did increase the productivity of the factory by a factor of at least 240, as Smith claimed, there was likely to be a surplus when the wage earners had received whatever their marginal product was. And when it came to dividing that surplus, the distribution of authority within that pin factory would be crucial. That distribution would surely favour the CEO. Since the CEO wrote – or at least commissioned – the pin factory’s annual report, the moral and economic argument could be turned on its head. If you were paid a lot, that showed that you contributed a lot. What the recipient earned was, by that fact alone, justified. So the ethic of just reward through effort gave way to the culture of present entitlement from possession. A recent survey of children – by Sky television, of all organisations – showed that their career aspirations, once directed towards professions, were now aimed at celebrity. They hoped to be pop stars or footballers, not teachers or doctors. They wanted – like the sixth Duke of Muck – respect: to be valued for what they were, not for what they had contributed. Children, of course, tell adults what they want to hear. But adults’ expectations are further confirmation of how economic and social values have been eroded. johnkay@johnkay.com Copyright The Financial Times Limited 2011. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. ## Hyperinflation - Wikipedia, the free encyclopedia Sweeping up the banknotes from the street after the Hungarian pengő was replaced in 1946 Certain figures in this article use scientific notation for readability. In economics, hyperinflation is inflation that is very high or "out of control". While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases rapidly as the functional or internal currency, as opposed to a foreign currency, loses its real value very quickly, normally at an accelerating rate.[1] Definitions used vary from one provided by the International Accounting Standards Board, which describes it as "a cumulative inflation rate over three years approaching 100% (26% per annum compounded for three years in a row)", to Cagan's (1956) "inflation exceeding 50% a month." [2] As a rule of thumb, normal monthly and annual low inflation and deflation are reported per month, while under hyperinflation the general price level could rise by 5 or 10% or even much more every day. A vicious circle is created in which more and more inflation is created with each iteration of the ever increasing money printing cycle. Hyperinflation becomes visible when there is an unchecked increase in the money supply (see hyperinflation in Zimbabwe) usually accompanied by a widespread unwillingness on the part of the local population to hold the hyperinflationary money for more than the time needed to trade it for something non-monetary to avoid further loss of real value. Hyperinflation is often associated with wars (or their aftermath), currency meltdowns, political or social upheavals, or aggressive bidding on currency exchanges. In 1956, Phillip Cagan wrote The Monetary Dynamics of Hyperinflation,[3] generally regarded as the first serious study of hyperinflation and its effects. In it, he defined hyperinflation as a monthly inflation rate of at least 50%. International Accounting Standard 1[4] requires a presentation currency. IAS 21[5] provides for translations of foreign currencies into the presentation currency. IAS 29[6] establishes special accounting rules for use in hyperinflationary environments, and lists four factors which can trigger application of these rules: 1. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held are immediately invested to maintain purchasing power. 2. The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices may be quoted in that foreign currency. 3. Sales and purchases on credit take place at prices that are increased by an amount that will compensate for the expected loss of purchasing power during the credit period, even if the period is short. 4. Interest rates, wages and prices are linked to a price index and the cumulative inflation rate over three years approaches, or exceeds, 100%. In its its Exposure Draft: Severe Hyperinflation – Proposed Amendment to IFRS 1, the IASB has requested comment on a proposed categorization of an economy subject to severe hyperinflation as one in which the currency has both of the following characteristics: (a) a reliable general price index is not available to all entities with transactions and balances in the currency. (b) exchangeability between the currency and a relatively stable foreign currency does not exist.[7] Germany, 1923: banknotes had lost so much value that they were used as wallpaper. The main cause of hyperinflation is a massive and rapid increase in the amount of money (including bank credit, deposits, and currency) that is not supported by a corresponding growth in the output of goods and services. This results in an imbalance between the supply and demand for the money, accompanied by a complete loss of confidence in the money, similar to a bank run. This loss of confidence causes a rapid increase in velocity of spending which causes a corresponding rapid increase in prices. Once inflation has become established, sellers try to hedge against it by increasing prices. This leads to further waves of price increases.[8] Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fail to force acceptance of the rapidly increasing money supply which lacks intrinsic value. If the entity responsible for increasing bank credit and/or printing currency promotes excessive money creation, with other factors contributing a reinforcing effect, hyperinflation usually continues. Often the body responsible for printing the currency cannot physically print paper currency faster than the rate at which it is devaluing, thus neutralizing their attempts to stimulate the economy.[9] Hyperinflation is generally associated with paper money, which can easily be used to increase the money supply: add more zeros to the plates and print, or even stamp old notes with new numbers.[10] Historically, there have been numerous episodes of hyperinflation in various countries followed by a return to "hard money". Older economies would revert to hard currency and barter when the circulating medium became excessively devalued, generally following a "run" on the store of value. Hyperinflation effectively wipes out the purchasing power of private and public savings, distorts the economy in favor of extreme consumption and hoarding of real assets, causes the monetary base, whether specie or hard currency, to flee the country, and makes the afflicted area anathema to investment. Hyperinflation is met with drastic remedies, such as imposing the shock therapy of slashing government expenditures or altering the currency basis. One form this may take is dollarization, the use of a foreign currency (not necessarily the U.S. dollar) as a national unit of currency. An example was dollarization in Ecuador, initiated in September 2000 in response to a 75% loss of value of the Ecuadorian sucre in early 2000. The aftermath of hyperinflation is equally complex. As hyperinflation has always been a traumatic experience for the area which suffers it, the next policy regime almost always enacts policies to prevent its recurrence. Often this means making the central bank very aggressive about maintaining price stability, as was the case with the German Bundesbank or moving to some hard basis of currency such as a currency board. Many governments have enacted extremely stiff wage and price controls in the wake of hyperinflation but this does not prevent further inflating of the money supply by its central bank, and always leads to widespread shortages of consumer goods if the controls are rigidly enforced. As it allows a government to devalue their spending and displace (or avoid) a tax increase, governments have sometimes resorted to excessively loose monetary policy to meet their expenses. Inflation is effectively a regressive consumption tax,[11] but less overt than levied taxes and therefore harder to understand by ordinary citizens. Inflation can obscure quantitative assessments of the true cost of living, as published price indices only look at data in retrospect, so may increase only months or years later. Monetary inflation can become hyperinflation if monetary authorities fail to fund increasing government expenses from taxes, government debt, cost cutting, or by other means, because either • during the time between recording or levying taxable transactions and collecting the taxes due, the value of the taxes collected falls in real value to a small fraction of the original taxes receivable; or • government debt issues fail to find buyers except at very deep discounts; or • a combination of the above. Theories of hyperinflation generally look for a relationship between seigniorage and the inflation tax. In both Cagan's model and the neo-classical models, a tipping point occurs when the increase in money supply or the drop in the monetary base makes it impossible for a government to improve its financial position. Thus when fiat money is printed, government obligations that are not denominated in money increase in cost by more than the value of the money created. From this, it might be wondered why any rational government would engage in actions that cause or continue hyperinflation. One reason for such actions is that often the alternative to hyperinflation is either depression or military defeat. The root cause is a matter of more dispute. In both classical economics and monetarism, it is always the result of the monetary authority irresponsibly borrowing money to pay all its expenses. These models focus on the unrestrained seigniorage of the monetary authority, and the gains from the inflation tax. In Neoliberalism, hyperinflation is considered to be the result of a crisis of confidence. The monetary base of the country flees, producing widespread fear that individuals will not be able to convert local currency to some more transportable form, such as gold or an internationally recognized hard currency. This is a quantity theory of hyperinflation.[citation needed] In neo-classical economic theory, hyperinflation is rooted in a deterioration of the monetary base, that is the confidence that there is a store of value which the currency will be able to command later. In this model, the perceived risk of holding currency rises dramatically, and sellers demand increasingly high premiums to accept the currency. This in turn leads to a greater fear that the currency will collapse, causing even higher premiums. One example of this is during periods of warfare, civil war, or intense internal conflict of other kinds: governments need to do whatever is necessary to continue fighting, since the alternative is defeat. Expenses cannot be cut significantly since the main outlay is armaments. Further, a civil war may make it difficult to raise taxes or to collect existing taxes. While in peacetime the deficit is financed by selling bonds, during a war it is typically difficult and expensive to borrow, especially if the war is going poorly for the government in question. The banking authorities, whether central or not, "monetize" the deficit, printing money to pay for the government's efforts to survive. The hyperinflation under the Chinese Nationalists from 1939 to 1945 is a classic example of a government printing money to pay civil war costs. By the end, currency was flown in over the Himalayas, and then old currency was flown out to be destroyed. Hyperinflation is regarded as a complex phenomenon and one explanation may not be applicable to all cases. However, in both of these models, whether loss of confidence comes first, or central bank seigniorage, the other phase is ignited. In the case of rapid expansion of the money supply, prices rise rapidly in response to the increased supply of money relative to the supply of goods and services, and in the case of loss of confidence, the monetary authority responds to the risk premiums it has to pay by "running the printing presses." The price of gold in Germany, 1 January 1918 – 30 November 1923. Nevertheless the immense acceleration process that occurs during hyperinflation (such as during the German hyperinflation of 1922/23) still remains unclear and unpredictable. The transformation of an inflationary development into the hyperinflation has to be identified as a very complex phenomenon, which could be a further advanced research avenue of the complexity economics in conjunction with research areas like mass hysteria, bandwagon effect, social brain and mirror neurons.[12] The United States has avoided hyperinflation. It came close, however, during the Revolutionary War, when the revolutionary government churned out paper continentals to pay bills. The monthly inflation rate reached a peak of 47 percent in November 1779 (Bernholz 2003: 48). A second close encounter occurred during the Civil War, when the Union government printed greenbacks to finance the war effort. Inflation peaked at a monthly rate of 40 percent in March 1864 (Bernholz 2003: 107).[13] Many other cases of extreme social conflict encouraging hyperinflation can be seen, as in Germany after World War I, Hungary at the end of World War II and in Yugoslavia in the late 1980s just before break up of the country. Less commonly, inflation may occur when there is debasement of the coinage: wherein are consistently shaved of some of their silver and gold, increasing the circulating medium and reducing the value of the currency. The "shaved" specie is then often restruck into coins with lower weight of gold or silver. Historical examples include Ancient Rome, China during the Song Dynasty, and the US beginning in 1933. When "token" coins begin circulating, it is possible for the minting authority to engage in fiat creation of currency. Much attention on hyperinflation naturally centres on the effect on savers whose investment become worthless. Academic economists seem not to have devoted much study on the (positive) effect on debtors. This may be due to the widespread perception that consistently saving a portion of one's income in monetary investments such as bonds or interest-bearing accounts is almost always a wise policy, and usually beneficial to the society of the savers. By contrast, incurring large or long-term debts (though sometimes unavoidable) is viewed as often resulting from irresponsibility or self-indulgence. Interest rate changes often cannot keep up with hyperinflation or even high inflation, certainly with contractually fixed interest rates. (For example, in the 1970s in the United Kingdom inflation reached 25% per annum, yet interest rates did not rise above 15% – and then only briefly – and many fixed interest rate loans existed). Contractually there is often no bar to a debtor clearing his long term debt with "hyperinflated-cash" nor could a lender simply somehow suspend the loan. "Early redemption penalties" were (and still are) often based on a penalty of x months of interest/payment; again no real bar to paying off what had been a large loan. In interwar Germany, for example, much private and corporate debt was effectively wiped out; certainly for those holding fixed interest rate loans. Since hyperinflation is visible as a monetary effect, models of hyperinflation center on the demand for money. Economists see both a rapid increase in the money supply and an increase in the velocity of money if the (monetary) inflating is not stopped. Either one, or both of these together are the root causes of inflation and hyperinflation. A dramatic increase in the velocity of money as the cause of hyperinflation is central to the "crisis of confidence" model of hyperinflation, where the risk premium that sellers demand for the paper currency over the nominal value grows rapidly. The second theory is that there is first a radical increase in the amount of circulating medium, which can be called the "monetary model" of hyperinflation. In either model, the second effect then follows from the first — either too little confidence forcing an increase in the money supply, or too much money destroying confidence. In the confidence model, some event, or series of events, such as defeats in battle, or a run on stocks of the specie which back a currency, removes the belief that the authority issuing the money will remain solvent — whether a bank or a government. Because people do not want to hold notes which may become valueless, they want to spend them. Sellers, realizing that there is a higher risk for the currency, demand a greater and greater premium over the original value. Under this model, the method of ending hyperinflation is to change the backing of the currency, often by issuing a completely new one. War is one commonly cited cause of crisis of confidence, particularly losing in a war, as occurred during Napoleonic Vienna, and capital flight, sometimes because of "contagion" is another. In this view, the increase in the circulating medium is the result of the government attempting to buy time without coming to terms with the root cause of the lack of confidence itself. In the monetary model, hyperinflation is a positive feedback cycle of rapid monetary expansion. It has the same cause as all other inflation: money-issuing bodies, central or otherwise, produce currency to pay spiralling costs, often from lax fiscal policy, or the mounting costs of warfare. When businesspeople perceive that the issuer is committed to a policy of rapid currency expansion, they mark up prices to cover the expected decay in the currency's value. The issuer must then accelerate its expansion to cover these prices, which pushes the currency value down even faster than before. According to this model the issuer cannot "win" and the only solution is to abruptly stop expanding the currency. Unfortunately, the end of expansion can cause a severe financial shock to those using the currency as expectations are suddenly adjusted. This policy, combined with reductions of pensions, wages, and government outlays, formed part of the Washington consensus of the 1990s. Whatever the cause, hyperinflation involves both the supply and velocity of money. Which comes first is a matter of debate, and there may be no universal story that applies to all cases. But once the hyperinflation is established, the pattern of increasing the money stock, by whichever agencies are allowed to do so, is universal. Because this practice increases the supply of currency without any matching increase in demand for it, the price of the currency, that is the exchange rate, naturally falls relative to other currencies. Inflation becomes hyperinflation when the increase in money supply turns specific areas of pricing power into a general frenzy of spending quickly before money becomes worthless. The purchasing power of the currency drops so rapidly that holding cash for even a day is an unacceptable loss of purchasing power. As a result, no one holds currency, which increases the velocity of money, and worsens the crisis. That is, rapidly rising prices undermine money's role as a store of value, so that people try to spend it on real goods or services as quickly as possible. Thus, the monetary model predicts that the velocity of money will rise endogenously as a result of the excessive increase in the money supply. At the point when ordinary purchases are affected by inflation pressures, hyperinflation is out of control, in the sense that ordinary policy mechanisms, such as increasing reserve requirements, raising interest rates or cutting government spending will all be responded to by shifting away from the rapidly dwindling currency and towards other means of exchange. During a period of hyperinflation, bank runs, loans for 24-hour periods, switching to alternate currencies, the return to use of gold or silver or even barter become common. Many of the people who hoard gold today expect hyperinflation, and are hedging against it by holding specie. There may also be extensive capital flight or flight to a "hard" currency such as the US dollar. This is sometimes met with capital controls, an idea which has swung from standard, to anathema, and back into semi-respectability. All of this constitutes an economy which is operating in an "abnormal" way, which may lead to decreases in real production. If so, that intensifies the hyperinflation, since it means that the amount of goods in "too much money chasing too few goods" formulation is also reduced. This is also part of the vicious circle of hyperinflation. Once the vicious circle of hyperinflation has been ignited, dramatic policy means are almost always required, simply raising interest rates is insufficient. Bolivia, for example, underwent a period of hyperinflation in 1985, where prices increased 12,000% in the space of less than a year. The government raised the price of gasoline, which it had been selling at a huge loss to quiet popular discontent, and the hyperinflation came to a halt almost immediately, since it was able to bring in hard currency by selling its oil abroad. The crisis of confidence ended, and people returned deposits to banks. The German hyperinflation (1919-Nov. 1923) was ended by producing a currency based on assets loaned against by banks, called the Rentenmark. Hyperinflation often ends when a civil conflict ends with one side winning. Although wage and price controls are sometimes used to control or prevent inflation, no episode of hyperinflation has been ended by the use of price controls alone. However, wage and price controls have sometimes been part of the mix of policies used to halt hyperinflation. As noted, in countries experiencing hyperinflation, the central bank often prints money in larger and larger denominations as the smaller denomination notes become worthless. This can result in the production of some interesting banknotes, including those denominated in amounts of 1,000,000,000 or more. • By late 1923, the Weimar Republic of Germany was issuing two-trillion Mark banknotes and postage stamps with a face value of fifty billion Mark. The highest value banknote issued by the Weimar government's Reichsbank had a face value of 100 trillion Mark (100,000,000,000,000; 100 million million).[14][15] At the height of the inflation, one US dollar was worth 4 trillion German marks. One of the firms printing these notes submitted an invoice for the work to the Reichsbank for 32,776,899,763,734,490,417.05 (3.28 × 1019, or 33 quintillion) Marks.[16] • The largest denomination banknote ever officially issued for circulation was in 1946 by the Hungarian National Bank for the amount of 100 quintillion pengő (100,000,000,000,000,000,000, or 1020; 100 million million million) image. (There was even a banknote worth 10 times more, i.e. 1021 pengő, printed, but not issued image.) The banknotes however did not depict the numbers, "hundred million b.-pengő" ("hundred million trillion pengő") and "one milliard b.-pengő" were spelled out instead. This makes the 500,000,000,000 Yugoslav October dinar and 100,000,000,000,000 Zimbabwean dollar banknotes the notes with the greatest number of zeros shown. • The Post-World War II hyperinflation of Hungary held the record for the most extreme monthly inflation rate ever — 41,900,000,000,000,000% (4.19 × 1016% or 41.9 quadrillion percent) for July, 1946, amounting to prices doubling every 13.5 hours. By comparison, recent figures (as of 14 November 2008) estimate Zimbabwe's annual inflation rate at 89.7 sextillion (1021) percent.,[17] which corresponds to a monthly rate of 5473%, and a doubling time of about five days. In figures, that is 89,700,000,000,000,000,000,000%. One way to avoid the use of large numbers is by declaring a new unit of currency (an example being, instead of 10,000,000,000 Dollars, a bank might set 1 new dollar = 1,000,000,000 old dollars, so the new note would read "10 new dollars.") An example of this would be Turkey's revaluation of the Lira on 1 January 2005, when the old Turkish lira (TRL) was converted to the New Turkish lira (TRY) at a rate of 1,000,000 old to 1 new Turkish Lira. While this does not lessen the actual value of a currency, it is called redenomination or revaluation and also happens over time in countries with standard inflation levels. During hyperinflation, currency inflation happens so quickly that bills reach large numbers before revaluation. Some banknotes were stamped to indicate changes of denomination. This is because it would take too long to print new notes. By the time new notes were printed, they would be obsolete (that is, they would be of too low a denomination to be useful). Metallic coins were rapid casualties of hyperinflation, as the scrap value of metal enormously exceeded the face value. Massive amounts of coinage were melted down, usually illicitly, and exported for hard currency. Governments will often try to disguise the true rate of inflation through a variety of techniques. None of these actions addresses the root causes of inflation and they, if discovered, tend to further undermine trust in the currency, causing further increases in inflation. Price controls will generally result in shortages and hoarding and extremely high demand for the controlled goods, resulting in disruptions of supply chains. Products available to consumers may diminish or disappear as businesses no longer find it sufficiently profitable (or may be operating at a loss) to continue producing and/or distributing such goods at the legal prices, further exacerbating the shortages. Angola experienced hyperinflation from 1991 to 1995. It was a result of exchange restrictions following the introduction of the novo kwanza (AON) to replace the original kwanza (AOK) in 1990. At the first months of 1991, the highest denomination was 50 000 AON. By 1994, the highest denomination was 500 000 kwanzas. In the 1995 currency reform, the readjusted kwanza (AOR) replaced the novo kwanza at the ratio of 1 000 AON to 1 AOR, but hyperinflation continued as further denominations of up to 5 000 000 AOR were issued. In the 1999 currency reform, the kwanza (AOA) was reintroduced at the ratio of 1 million AOR to 1 AOA. Currently, the highest denomination banknote is 2 000 AOA and the overall impact of hyperinflation was 1 AOA = 1 billion AOK. Argentina went through steady inflation from 1975 to 1991. At the beginning of 1975, the highest denomination was 1,000 pesos. In late 1976, the highest denomination was 5,000 pesos. In early 1979, the highest denomination was 10,000 pesos. By the end of 1981, the highest denomination was 1,000,000 pesos. In the 1983 currency reform, 1 Peso argentino was exchanged for 10,000 pesos. In the 1985 currency reform, 1 austral was exchanged for 1,000 pesos argentinos. In the 1992 currency reform, 1 new peso was exchanged for 10,000 australes. The overall impact of hyperinflation: 1 (1992) peso = 100,000,000,000 pre-1983 pesos. Ellen Brown, author of Web of Debt, admits that the left-oriented policy that Argentina had had since 1947, when Juan Peron came to power, did actually create inflation. But the inflation did not become a national crisis until during the eight years that followed Peron's death 1974. During these years the inflation rose to 206 percent, due to a "deliberate radical devaluation of the currency of the new government, along with a 175 percent increase in oil prices". This devaluation was, as she sees it, done with the hidden purpose of destabilizing the economy (to create a chaos). And it was, in any case, not caused by a sudden and massive increase in the printing of money by the government. She also cites Professor Escudé who writes that this devaluation led both to "the astronomical high inflation" and "to the spread of speculative financial system that became a hallmark of Argentina's financial life".[citation needed] In 1922, inflation in Austria reached 1426%, and from 1914 to January 1923, the consumer price index rose by a factor of 11836, with the highest banknote in denominations of 500,000 krones.[18] Belarus experienced steady inflation from 1994 to 2002. In 1993, the highest denomination was 5,000 rublei. By 1999, it was 5,000,000 rublei. In the 2000 currency reform, the ruble was replaced by the new ruble at an exchange rate of 1 new ruble = 1,000 old rublei. The highest denomination in 2008 was 100,000 rublei, equal to 100,000,000 pre-2000 rublei. Bolivia experienced its worst inflation between 1984 and 1986. Before 1984, the highest denomination was 1,000 pesos bolivianos. By 1985, the highest denomination was 10 Million pesos bolivianos. In 1985, a Bolivian note for 1 million pesos was worth 55 cents in US dollars, one-thousandth of its exchange value of$5,000 less than three years previously.[19] In the 1987 currency reform, the Peso Boliviano was replaced by the Boliviano at a rate of 1,000,000 : 1.

Bosnia and Herzegovina went through its worst inflation in 1993. In 1992, the highest denomination was 1,000 dinara. By 1993, the highest denomination was 100,000,000 dinara. In the Republika Srpska, the highest denomination was 10,000 dinara in 1992 and 10,000,000,000 dinara in 1993. 50,000,000,000 dinara notes were also printed in 1993 but never issued.

From 1986–1994, the base currency unit was shifted three times to adjust for inflation in the final years of the Brazilian military dictatorship era. A 1967 cruzeiro was, in 1994, worth less than one trillionth of a US cent, after adjusting for multiple devaluations and note changes. In that same year, inflation reached a record 2075.8%. A new currency called real was adopted in 1994, and hyperinflation was eventually brought under control.[20] The real was also the currency in use until 1942; 1 (current) real is the equivalent of 2,750,000,000,000,000,000 of Brazil's first currency (called réis in Portuguese).[21]

In 1996, the Bulgarian economy collapsed due to the BSP's slow and mismanaged economic reforms, its disastrous agricultural policy, and an unstable and decentralized banking system, which led to an inflation rate of 311% and the collapse of the lev, with the exchange rate to dollars reaching 3000. When pro-reform forces came into power in the spring 1997, an ambitious economic reform package, including introduction of a currency board regime and pegging the Bulgarian Lev to the German Deutsche Mark (and consequently to the euro), was agreed to with the International Monetary Fund and the World Bank, and the economy began to stabilize.

As the first user of fiat currency, China has had an early history of troubles caused by hyperinflation. The Yuan Dynasty printed huge amounts of fiat paper money to fund their wars, and the resulting hyperinflation, coupled with other factors, led to its demise at the hands of a revolution. The Republic of China went through the worst inflation 1948–49. In 1947, the highest denomination was 50,000 yuan. By mid-1948, the highest denomination was 180,000,000 yuan. The 1948 currency reform replaced the yuan by the gold yuan at an exchange rate of 1 gold yuan = 3,000,000 yuan. In less than a year, the highest denomination was 10,000,000 gold yuan. In the final days of the civil war, the Silver Yuan was briefly introduced at the rate of 500,000,000 Gold Yuan. Meanwhile the highest denomination issued by a regional bank was 6,000,000,000 yuan (issued by Xinjiang Provincial Bank in 1949). After the renminbi was instituted by the new communist government, hyperinflation ceased with a revaluation of 1:10,000 old Renminbi in 1955.

Danzig went through its worst inflation in 1923. In 1922, the highest denomination was 1,000 Mark. By 1923, the highest denomination was 10,000,000,000 Mark.

Georgia went through its worst inflation in 1994. In 1993, the highest denomination was 100,000 coupons [kuponi]. By 1994, the highest denomination was 1,000,000 coupons. In the 1995 currency reform, a new currency, the lari, was introduced with 1 lari exchanged for 1,000,000 coupons.

Germany went through its worst inflation in 1923. In 1922, the highest denomination was 50,000 Mark. By 1923, the highest denomination was 100,000,000,000,000 Mark. In December 1923 the exchange rate was 4,200,000,000,000 Marks to 1 US dollar.[22] In 1923, the rate of inflation hit 3.25 × 106 percent per month (prices double every two days). Beginning on 20 November 1923, 1,000,000,000,000 old Marks were exchanged for 1 Rentenmark so that 4.2 Rentenmarks were worth 1 US dollar, exactly the same rate the Mark had in 1914.[22]

Greece went through its worst inflation in 1944. In 1942, the highest denomination was 50,000 drachmai. By 1944, the highest denomination was 100,000,000,000 drachmai. In the 1944 currency reform, 1 new drachma was exchanged for 50,000,000,000 drachmai. Another currency reform in 1953 replaced the drachma at an exchange rate of 1 new drachma = 1,000 old drachmai. The overall impact of hyperinflation: 1 (1953) drachma = 50,000,000,000,000 pre 1944 drachmai. The Greek monthly inflation rate reached 8.5 billion percent in October 1944.

The Treaty of Trianon and political instability between 1919 and 1924 led to a major inflation of Hungary’s currency. Unable to tax adequately, the government resorted to printing money and by 1922 inflation in Hungary had reached 98% per month.

The 100 million b.-pengő note was the highest denomination of banknote ever issued, worth 1020 or 100 quintillion Hungarian pengő (1946).

Hungary went through the worst inflation ever recorded between the end of 1945 and July 1946. In 1944, the highest denomination was 1,000 pengő. By the end of 1945, it was 10,000,000 pengő. The highest denomination in mid-1946 was 1,000,000,000,000,000,000,000 pengő. A special currency the adópengő – or tax pengő – was created for tax and postal payments.[23] The value of the adópengő was adjusted each day, by radio announcement. On 1 January 1946 one adópengő equaled one pengő. By late July, one adópengő equaled 2,000,000,000,000,000,000,000 or 2×1021 pengő. When the pengő was replaced in August 1946 by the forint, the total value of all Hungarian banknotes in circulation amounted to one tenth of one US cent.[24] It is the most severe known incident of inflation recorded, peaking at 1.3 × 1016 percent per month (prices double every 15 hours).[25] The overall impact of hyperinflation: On 18 August 1946, 400,000,000,000,000,000,000,000,000,000 or 4×1029 (four hundred octillion (short scale)) pengő became 1 forint.

Some historians believe[26] that this hyperinflation was purposely started by trained Russian Marxists in order to destroy the Hungarian middle and upper classes.

Inflation accelerated in the 1970s, rising steadily from 13% in 1971 to 111% in 1979. From 133% in 1980, it leaped to 191% in 1983 and then to 445% in 1984, threatening to become a four-digit figure within a year or two. In 1985 Israel froze most prices by law[citation needed] and enacted other measures as part of an economic stabilization plan. That same year, inflation more than halved, to 185%. Within a few months, the authorities began to lift the price freeze on some items; in other cases it took almost a year. By 1986, inflation was down to 19%.

The Republic of Serbian Krajina went through its worst inflation in 1993. In 1992, the highest denomination was 50,000 dinara. By 1993, the highest denomination was 50,000,000,000 dinara. Note that this unrecognized country was reincorporated into Croatia in 1995.

In spite of the Oil Crisis of the late 1970s (Mexico is a producer and exporter), and due to excessive social spending, Mexico defaulted on its external debt in 1982. As a result, the country suffered a severe case of capital flight and several years of hyperinflation and peso devaluation. On 1 January 1993, Mexico created a new currency, the nuevo peso ("new peso", or MXN), which chopped 3 zeros off the old peso, an inflation rate of 10,000% over the several years of the crisis. (One new peso was equal to 1000 of the obsolete MXP pesos).

Though the North Korean won never technically failed, and is still the official currency of the reclusive communist nation, a 2009 revaluation showed the rest of the world rare cracks in the monolithic image Pyongyang presents. The government gave citizens seven days to turn in their old won for new won – with 1,000 of the old worth 10 of the new – but allowed a maximum exchange of 150,000 of the old won, or about $40 worth. The revaluation and exchange cap wiped out the savings of many North Koreans, and reportedly caused unrest in parts of the country. According to a September 2009 BBC report, some department stores in Pyongyang even stopped accepting North Korean won, instead insisting upon payment in U.S. dollars or Japanese yen. Nicaragua went through the worst inflation from 1987 to 1990. From 1943 to April 1971, one US dollar equalled 7 córdobas. From April 1971-early 1978, one US dollar was worth 10 córdobas. In early 1986, the highest denomination was 10,000 córdobas. By 1987, it was 1,000,000 córdobas. In the 1988 currency reform, 1 new córdoba was exchanged for 10,000 old córdobas. The highest denomination in 1990 was 100,000,000 new córdobas. In the 1991 currency reform, 1 new córdoba was exchanged for 5,000,000 old córdobas. The overall impact of hyperinflation: 1 (1991) córdoba = 50,000,000,000 pre-1988 córdobas. Peru experienced its worst inflation from 1988–1990. In the 1985 currency reform, 1 inti was exchanged for 1,000 soles. In 1986, the highest denomination was 1,000 intis. But in September 1988, monthly inflation went to 132%. In August 1990, monthly inflation was 397%. The highest denomination was 5,000,000 intis by 1991. In the 1991 currency reform, 1 nuevo sol was exchanged for 1,000,000 intis. The overall impact of hyperinflation: 1 nuevo sol = 1,000,000,000 (old) soles. The Japanese government occupying the Philippines during the World War II issued fiat currencies for general circulation. The Japanese-sponsored Second Philippine Republic government led by Jose P. Laurel at the same time outlawed possession of other currencies, most especially "guerilla money." The fiat money was dubbed "Mickey Mouse Money" because it is similar to play money and is next to worthless. Survivors of the war often tell tales of bringing suitcase or bayong (native bags made of woven coconut or buri leaf strips) overflowing with Japanese-issued bills. In the early times, 75 Mickey Mouse pesos could buy one duck egg.[27] In 1944, a box of matches cost more than 100 Mickey Mouse pesos.[28] In 1942, the highest denomination available was 10 pesos. Before the end of the war, because of inflation, the Japanese government was forced to issue 100, 500 and 1000 peso notes. After Poland’s independence in 1918, the country soon began experiencing extreme inflation. By 1921, prices had already risen 251 times above those of 1914, but in the following three years they rose by 988,223%[29] with a peak rate in late 1923 of prices doubling every nineteen and a half days.[30] At independence there was 8 marek per US dollar, but by 1923 the exchange rate was 6,375,000 marek (mkp) for 1 US dollar. The highest denomination was 10,000,000 mkp. In the 1924 currency reform there was a new currency introduced: 1 zloty = 1,800,000 mkp. Poland experienced a second hyperinflation between 1989 and 1991. The highest denomination in 1989 was 200,000 zlotych. It was 1,000,000 zlotych in 1991 and 2,000,000 zlotych in 1992; the exchange rate was 9500 zlotych for 1 US dollar in January 1990 and 19600 zlotych at the end of August 1992. In the 1994 currency reform, 1 new zloty was exchanged for 10,000 old zlotych and 1 US$ exchange rate was ca. 2.5 zlotych (new).

Republika Srpska was a breakaway region of Bosnia. As with Krajina, it pegged its currency, the Republika Srpska dinar, to that of Yugoslavia. Their bills were almost the same as Krajina's, but they issued fewer and did not issue currency after 1993.

Romania experienced hyperinflation in the 1990s. The highest denomination in 1990 was 100 lei and in 1998 was 100,000 lei. By 2000 it was 500,000 lei. In early 2005 it was 1,000,000 lei. In July 2005 the leu was replaced by the new leu at 10,000 old lei = 1 new leu. Inflation in 2005 was 9%. [2] In July 2005 the highest denomination became 500 lei (= 5,000,000 old lei).

Between 1921 and 1922, inflation in the Soviet Union reached 213%.

In 1992, the first year of post-Soviet economic reform, inflation was 2,520%. In 1993, the annual rate was 840%, and in 1994, 224%. The ruble devalued from about 40 r/$in 1991 to about 5,000 r/$ in late 1997. In 1998, a denominated ruble was introduced at the exchange rate of 1 new ruble = 1,000 pre-1998 rubles. In the second half of the same year, ruble fell to about 30 r/$as a result of financial crisis. As the Chinese Civil War reached its peak, Taiwan also suffered from the hyperinflation that has ravaged China in late 1940s. Highest denomination issued was a 1,000,000 Dollar Bearer's Cheque. Inflation was finally brought under control at introduction of New Taiwan Dollar in 15 June 1949 at rate of 40,000 old Dollar = 1 New Dollar A 100,000 Ukrainian karbovantsi (used between 1992 and 1996). In 1996, it was taken out of circulation, and was replaced by the Hryvnya at an exchange rate of 100,000 karbovantsi = 1 Hryvnya (approx. USD 0.50 at that time, about USD 0.20 as of 2007). This translates to an average inflation rate of approximately 1400% per month between 1992 and 1996 Ukraine experienced its worst inflation between 1993 and 1995. In 1992, the Ukrainian karbovanets was introduced, which was exchanged with the defunct Soviet ruble at a rate of 1 UAK = 1 SUR. Before 1993, the highest denomination was 1,000 karbovantsiv. By 1995, it was 1,000,000 karbovantsiv. In 1996, during the transition to the Hryvnya and the subsequent phase out of the karbovanets, the exchange rate was 100,000 UAK = 1 UAH. This translates to a hyperinflation rate of approximately 1,400% per month. By some estimates, inflation for the entire calendar year of 1993 was 10,000% or higher, with retail prices reaching over 100 times their pre-1993 level by the end of the year.[31] During the Revolutionary War, the Continental Congress authorized the printing of paper currency called continental currency. These notes depreciated rapidly, giving rise to the expression "not worth a continental." During the U.S. Civil War, between January 1861 and April 1865, the Lerner Commodity Price Index of leading cities in the eastern Confederacy states increased from 100 to over 9,000.[32] As the Civil War dragged on, the Confederate dollar had less and less value, until it was almost worthless by the last few months of the war. A 500 billion Yugoslav dinar banknote circa 1993, the largest nominal value ever officially printed in Yugoslavia, the final result of hyperinflation. Yugoslavia went through a period of hyperinflation and subsequent currency reforms from 1989–1994. The highest denomination in 1988 was 50,000 dinars. By 1989 it was 2,000,000 dinars. In the 1990 currency reform, 1 new dinar was exchanged for 10,000 old dinars. In the 1992 currency reform, 1 new dinar was exchanged for 10 old dinars. The highest denomination in 1992 was 50,000 dinars. By 1993, it was 10,000,000,000 dinars. In the 1993 currency reform, 1 new dinar was exchanged for 1,000,000 old dinars. However, before the year was over, the highest denomination was 500,000,000,000 dinars. In the 1994 currency reform, 1 new dinar was exchanged for 1,000,000,000 old dinars. In another currency reform a month later, 1 novi dinar was exchanged for 13 million dinars (1 novi dinar = 1 German mark at the time of exchange). The overall impact of hyperinflation: 1 novi dinar = 1 × 1027~1.3 × 1027 pre 1990 dinars. Yugoslavia's rate of inflation hit 5 × 1015 percent cumulative inflation over the time period 1 October 1993 and 24 January 1994. Zaire went through a period of inflation between 1989 and 1996. In 1988, the highest denomination was 5,000 zaires. By 1992, it was 5,000,000 zaires. In the 1993 currency reform, 1 nouveau zaire was exchanged for 3,000,000 old zaires. The highest denomination in 1996 was 1,000,000 nouveaux zaires. In 1997, Zaire was renamed the Congo Democratic Republic and changed its currency to francs. 1 franc was exchanged for 100,000 nouveaux zaires. The overall impact of hyperinflation: 1 franc = 3 × 1011 pre 1989 zaires. The 100 trillion Zimbabwean dollar banknote (1014 dollars), equal to 1027 pre-2006 dollars Hyperinflation in Zimbabwe was one of the few instances that resulted in the abandonment of the local currency. At independence in 1980, the Zimbabwe dollar (ZWD) was worth about USD 1.25. Afterwards, however, rampant inflation and the collapse of the economy severely devalued the currency. Inflation was steady before Robert Mugabe in 1998 began a program of land reforms that primarily focused on taking land from white farmers and redistributing those properties and assets to black farmers, which sent food production and revenues from export of food plummeting.[33][34][35] The result was that to pay its expenditures Mugabe’s government and Gideon Gono’s Reserve Bank printed more and more notes with higher face values. Hyperinflation began early in the twenty-first century, reaching 624% in 2004. It fell back to low triple digits before surging to a new high of 1,730% in 2006. The Reserve Bank of Zimbabwe revalued on 1 August 2006 at a ratio of 1 000 ZWD to each second dollar (ZWN), but year-to-year inflation rose by June 2007 to 11,000% (versus an earlier estimate of 9,000%). Larger denominations were progressively issued: 1. 5 May: banknotes or "bearer cheques" for the value of ZWN 100 million and ZWN 250 million.[36] 2. 15 May: new bearer cheques with a value of ZWN 500 million (then equivalent to about USD 2.50).[37] 3. 20 May: a new series of notes (“agro cheques”) in denominations of$5 billion, $25 billion and$50 billion.
4. 21 July: “agro cheque” for $100 billion.[38] Inflation by 16 July officially surged to 2,200,000%[39] with some analysts estimating figures surpassing 9,000,000 percent.[40] As of 22 July 2008 the value of the ZWN fell to approximately 688 billion per 1 USD, or 688 trillion pre-August 2006 Zimbabwean dollars.[41] Date of redenomination Currency code Value 1 Aug 2006 ZWN 1 000 ZWD 1 Aug 2008 ZWR 1010 ZWN = 1013 ZWD 2 Feb 2009 ZWL 1012 ZWR = 1022 ZWN = 1025 ZWD On 1 August 2008, the Zimbabwe dollar was redenominated at the ratio of 1010 ZWN to each third dollar (ZWR).[42] On 19 August 2008, official figures announced for June estimated the inflation over 11,250,000%.[43] Zimbabwe's annual inflation was 231,000,000% in July[44] (prices doubling every 17.3 days). For periods after July 2008, no official inflation statistics were released. Prof. Steve H. Hanke overcame the problem by estimating inflation rates after July 2008 and publishing the Hanke Hyperinflation Index for Zimbabwe.[45] Prof. Hanke’s HHIZ measure indicated that the inflation peaked at an annual rate of 89.7 sextillion percent (89,700,000,000,000,000,000,000%) in mid-November 2008. The peak monthly rate was 79.6 billion percent, which is equivalent to a 98% daily rate, or around 7× 10^108 percent yearly rate. At that rate, prices were doubling every 24.7 hours. Note that many of these figures should be considered mostly theoretic, since the hyperinflation did not proceed at that rate a whole year.[46] At its November 2008 peak, Zimbabwe's rate of inflation approached, but failed to surpass, Hungary's July 1946 world record.[46] On 2 February 2009, the dollar was redenominated for the fourth time at the ratio of 1012 ZWR to 1 ZWL, only three weeks after the$100 trillion banknote was issued on 16 January,[47][48] but hyperinflation waned by then as official inflation rates in USD were announced and foreign transactions were legalised,[46] and on 12 April the dollar was abandoned in favour of using only foreign currencies. The overall impact of hyperinflation was 1 ZWL = 1025 ZWD.

Highest monthly inflation rates in history[46]
Country Currency name Month with highest inflation rate Highest monthly inflation rate Equivalent daily inflation rate Time required for prices to double
Hungary Hungarian pengő July 1946 4.19 × 1016 % 207.19% 15 hours
Zimbabwe Zimbabwe dollar November 2008 7.96 × 1010 % 98.01% 24.7 hours
Yugoslavia Yugoslav dinar January 1994 3.13 × 108 % 64.63% 1.4 days
Germany German Papiermark October 1923 29,500% 20.87% 3.7 days
Greece Greek drachma October 1944 13,800% 17.84% 4.3 days
Taiwan (Republic of China) Old Taiwan dollar May 1949 2,178% 10.98% 6.7 days

Inflation rate is usually measured in percent per year. It can also be measured in percent per month or in price doubling time.

Example of inflation rates and units
When first bought, an item cost 1 currency unit. Later, the price rose...
Old price New price 1 year later New price 10 years later New price 100 years later (Annual) inflation [%] Monthly
inflation
[%]
Price
doubling
time
[years]
Zero add time [years]
1 0.1 2300
1 0.3 769
1 1 231
1 3 77.9
1 10 24.1
1 100 3.32
1 900 1
1 3000 0.671 (8 months)
1 1014 0.0833 (1 month)
1 1.67 × 1075 0.0137 (5 days)
1 1.05 × 102,639 0.000379 (3.3 hours)

$\hbox{New price } y \hbox{ years later} = \hbox{old price } \times \left(1+\frac{\hbox{inflation}}{100}\right)^{y}$

$\hbox{Monthly inflation } = 100 \times \left(\left(1+\frac{\hbox{inflation}}{100}\right)^{\frac{1}{12}} -1\right)$

$\hbox{Price doubling time} = \frac{\log_{e} 2}{\log_{e} \left(1+ \frac{\hbox{inflation}}{100}\right)}$

$\hbox{Years per added zero of the price } = \frac{1}{\log_{e} \left(1+ \frac{\hbox{inflation}}{100}\right)}$

Often, at redenominations, three zeroes are cut from the bills. It can be read from the table that if the (annual) inflation is for example 100%, it takes 3.32 years to produce one more zero on the price tags, or 3 × 3.32 = 9.96 years to produce three zeroes. Thus can one expect a redenomination to take place about 9.96 years after the currency was introduced.

Western Europe, North America and many parts of Asia and Australasia have economies that depend heavily on computerized transaction procession of money transfers. However, most nations that are subject to hyperinflation risk have not done assessments as to the ability of the electronic part of the finance system to remain intact under hyperinflation.

It is assumed (based upon IT practices for transnational processing that have evolved since the 1970s) that most money held by banks is not represented by 64 bit floating numbers. Under hyperinflation conditions most bank processing systems could fail due to overflow conditions [3].

1. ^ O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 341, 404. ISBN 0-13-063085-3.
2. ^ Ragan, Christopher; Lipsey, Richard (2008). Macroeconomics. Toronto, Ontario, Canada: Pearson Education Canada. p. 645. ISBN 0-558-05845-0.
3. ^ Phillip Cagan, The Monetary Dynamics of Hyperinflation, in Milton Friedman (Editor), Studies in the Quantity Theory of Money, Chicago: University of Chicago Press (1956).
4. ^ "IAS 1 PRESENTATION OF FINANCIAL STATEMENTS". IASB. Retrieved 2008-09-19.
5. ^ "IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES". IASB. Retrieved 2008-09-19.
6. ^ Deloitte. FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES. Deloitte, IAS Plus. http://www.iasplus.com/standard/ias29.htm.
7. ^ Severe Hyperinflation: Proposed amendment to IFRS-1, page 6
8. ^ Hyperinflation: causes, cures, Bernard Mufute
9. ^ Hyperinflation: causes, cures Bernard Mufute, 2003-10-02, 'Hyperinflation has its root cause in money growth, which is not supported by growth in the output of goods and services. Usually the excessive money supply growth is caused by financing of the government budget deficit through the printing of money.'
10. ^ http://blogs.wsj.com/marketbeat/2008/03/06/jefferson-county-memories/ Jefferson County Miracles, Wall Street Journal, March 6, 2008.
11. ^ http://www.ssc.uwo.ca/economics/econref/workingpapers/researchreports/wp2000/wp2000_1.pdf
12. ^ Wolfgang Chr. Fischer (Editor), German Hyperinflation 1922/23 – A Law and Economics Approach, Eul Verlag, Köln, Germany 2010, p.124
13. ^ http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf
14. ^ 1 billion in the German long scale = 1000 milliard = 1 trillion US scale.
15. ^ Values of the most important German Banknotes of the Inflation Period from 1920 – 1923
16. ^ The Penniless Billionaires, Max Shapiro, New York Times Book Co., 1980, page 203, ISBN 0-8129-0923-2 Shipiro comments: "Of course, one must not forget the 5 pfennig!"
17. ^ Hanke, Steve H. (17 November 2008). "New Hyperinflation Index (HHIZ) Puts Zimbabwe Inflation at 89.7 sextillion percent". The Cato Institute. Retrieved 17 November 2008.
18. ^ http://www.fee.org/pdf/the-freeman/0604RMEbeling.pdf
19. ^ Weatherford, Jack (1997). The History of Money. Three Rivers Press. p. 194. ISBN 0609801724.
20. ^ How Brazil Beat Hyperinflation, by Leslie Evans
21. ^http://www.ai.com.br/pessoal/indices/moeda.htm
22. ^ a b Bresciani-Turroni, page 335
23. ^ Hungary: Postal history – Hyperinflation (part 2)
24. ^ Judt, Tony (2006). Postwar: A History of Europe Since 1945. Penguin. p. 87. ISBN 0143037757.
25. ^ Zimbabwe hyperinflation 'will set world record within six weeks' Zimbabwe Situation 2008-11-14
26. ^ Hungary: Postal History – Hyperinflation
27. ^ Barbara A. Noe (7 August 2005). "A Return to Wartime Philippines". Los Angeles Times. Retrieved 2006-11-16.
28. ^ Agoncillo, Teodoro A. Guerrero, Milagros C., History of the Filipino People, 1986, R.P. Garcia Publishing Company, Quezon City, Philippines
29. ^ [1]
30. ^ Hyperinflation: Mugabe Versus Milosević
31. ^ Yuriy Skolotiany, The past and the future of Ukrainian national currency, Interview with Anatoliy Halchynsky, Mirror Weekly, #33(612), 2—8 September 2006
32. ^ Money and Finance in the Confederate States of America, Marc Weidenmier, Claremont McKenna College
33. ^ Land reform in Zimbabwe
34. ^ Zimbabwe famine
35. ^ Greenspan, Alan. The Age of Turbulence: Adventures in a New World. New York: The Penguin Press. 2007. Page 339.
36. ^ Zimbabwe issues 250 mn dollar banknote to tackle price spiral- International Business-News-The Economic Times
37. ^ BBC NEWS: Zimbabwe bank issues $500m note 38. ^ http://uk.news.yahoo.com/afp/20080719/tbs-zimbabwe-economy-inflation-5268574.html 39. ^ "Zimbabwe inflation at 2,200,000%". BBC News. 16 July 2008. Retrieved 26 March 2010. 40. ^ http://www.thezimbabweindependent.com/index.php?option=com_contentview=articleid=20637:inflation-gallops-aheadcatid=28:zimbabwe%20business%20storiesItemid=59 41. ^ http://www.zimbabweanequities.com/ 42. ^ 43. ^ "Zimbabwe inflation rockets higher". BBC News. 19 August 2008. Retrieved 26 March 2010. 44. ^ http://news.yahoo.com/s/afp/20081009/wl_africa_afp/zimbabweeconomyinflation 45. ^ Steve H. Hanke, "New Hyperinflation Index (HHIZ) Puts Zimbabwe Inflation at 89.7 Sextillion Percent.” Washington, D.C.: Cato Institute. (Retrieved 17 November 2008) (http://www.cato.org/zimbabwe) 46. ^ a b c d Steve H. Hanke and Alex K. F. Kwok, "On the Measurement of Zimbabwe’s Hyperinflation." Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009). (http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf) 47. ^ http://www.africasia.com/services/news/newsitem.php?area=africaitem=090116063500.qczog3x4.php 48. ^ Zimbabwe dollar sheds 12 zeros, BBC News, 2009-02-02, retrieved 2008-02-02 • Costantino Bresciani-Turroni, The Economics of Inflation (English transl.). Northampton, England: Augustus Kelly Publishers, 1937, http://mises.org/books/economicsofinflation.pdf on the German 1919–1923 inflation. • Shun-Hsin Chou, The Chinese Inflation 1937–1949, New York, Columbia University Press, 1963, Library of Congress Cat. 62-18260. • Andrew Dickson White, Fiat Money Inflation in France, Caxton Printers, Idaho, 1969. a popular description of the 1789–1799 inflation. • Steve H. Hanke, “Zimbabwe: From Hyperinflation to Growth.” Development Policy Analysis No. 6. Washington, D.C.: Cato Institute, Center for Global Liberty and Prosperity. (June 25, 2008) (http://www.cato.org/pubs/dpa/dpa6.pdf) • Steve H. Hanke and Alex K. F. Kwok, "On the Measurement of Zimbabwe’s Hyperinflation." Cato Journal, Vol. 29, No. 2 (Spring/Summer 2009). (http://www.cato.org/pubs/journal/cj29n2/cj29n2-8.pdf) • Wolfgang Chr. Fischer (Editor), "German Hyperinflation 1922/23 – A Law and Economics Approach", Eul Verlag, Köln, Germany 2010. ## Hyperinflation: The Concise Encyclopedia of Economics | Library of Economics and Liberty Inflation is a sustained increase in the aggregate price level. Hyperinflation is very high inflation. Although the threshold is arbitrary, economists generally reserve the term “hyperinflation” to describe episodes when the monthly inflation rate is greater than 50 percent. At a monthly rate of 50 percent, an item that cost$1 on January 1 would cost \$130 on January 1 of the following year.

Hyperinflation is largely a twentieth-century phenomenon. The most widely studied hyperinflation occurred in Germany after World War I. The ratio of the German price index in November 1923 to the price index in August 1922—just fifteen months earlier—was 1.02 × 1010. This huge number amounts to a monthly inflation rate of 322 percent. On average, prices quadrupled each month during the sixteen months of hyperinflation.

While the German hyperinflation is better known, a much larger hyperinflation occurred in Hungary after World War II. Between August 1945 and July 1946 the general level of prices rose at the astounding rate of more than 19,000 percent per month, or 19 percent per day.

Even these very large numbers understate the rates of inflation experienced during the worst days of the hyperinflations. In October 1923, German prices rose at the rate of 41 percent per day. And in July 1946, Hungarian prices more than tripled each day.

What causes hyperinflations? No single shock, no matter how severe, can explain sustained, continuously rapid growth in prices. The world wars themselves did not cause the hyperinflations in Germany and Hungary. The destruction of resources during the wars can explain why prices in Germany and Hungary would be higher after the wars than before. But the wars themselves cannot explain why prices would continuously rise at rapid rates during hyperinflation periods.

Hyperinflations are caused by extremely rapid growth in the supply of “paper” money. They occur when the monetary and fiscal authorities of a nation regularly issue large quantities of money to pay for a large stream of government expenditures. In effect, inflation is a form of taxation in which the government gains at the expense of those who hold money while its value is declining. Hyperinflations are very large taxation schemes.

During the German hyperinflation the number of German marks in circulation increased by a factor of 7.32 × 109. In Hungary, the comparable increase in the money supply was 1.19 × 1025. These numbers are smaller than those given earlier for the growth in prices. What does it mean when prices increase more rapidly than the supply of money?

Economists use a concept called the “real quantity of money” to discuss what happens to people’s money-holding behavior when prices grow rapidly. The real quantity of money, sometimes called the “purchasing power of money,” is the ratio of the amount of money held to the price level. Imagine that the typical household consumes a certain bundle of goods. The real quantity of money measures the number of bundles a household could buy with the money it holds. In low-inflation periods, a household will maintain a high real money balance because it is convenient to do so. In high-inflation periods, a household will maintain a lower real money balance to avoid the inflation “tax.” They avoid the inflation tax by holding more of their wealth in the form of physical commodities. As they buy these commodities, prices rise higher and inflation increases. Figure 1 shows real money balances and inflation for Germany from the beginning of 1919 until April 1923. The graph indicates that Germans lowered real balances as inflation increased. The last months of the German hyperinflation are not pictured in the figure because the inflation rate was too high to preserve the scale of the graph.

Hyperinflations tend to be self-perpetuating. Suppose a government is committed to financing its expenditures by issuing money and begins by raising the money stock by 10 percent per month. Soon the rate of inflation will increase, say, to 10 percent per month. The government will observe that it can no longer buy as much with the money it is issuing and is likely to respond by raising money growth even further. The hyperinflation cycle has begun. During the hyperinflation there will be a continuing tug-of-war between the public and the government. The public is trying to spend the money it receives quickly in order to avoid the inflation tax; the government responds to higher inflation with even higher rates of money issue.

Most economists agree that inflation lowers economic welfare even when allowing for revenue from the inflation tax and the distortion that would be created by alternative taxes that raise the same revenue.1

Figure 1 During the German Hyperinflation, the Real Quantity of Money Fell as Inflation Increased

How do hyperinflations end? The standard answer is that governments have to make a credible commitment to halting the rapid growth in the stock of money. Proponents of this view consider the end of the German hyperinflation to be a case in point. In late 1923, Germany undertook a monetary reform, creating a new unit of currency called the rentenmark. The German government promised that the new currency could be converted on demand into a bond having a certain value in gold. Proponents of the standard answer argue that the guarantee of convertibility is properly viewed as a promise to cease the rapid issue of money.

An alternative view held by some economists is that not just monetary reform, but also fiscal reform, is needed to end a hyperinflation. According to this view, a successful reform entails two believable commitments on the part of government. The first is a commitment to halt the rapid growth of paper money. The second is a commitment to bring the government’s budget into balance. This second commitment is necessary for a successful reform because it removes, or at least lessens, the incentive for the government to resort to inflationary taxation. If the government commits to balancing its budget, people can reasonably believe that money growth will not rise again to high levels in the near future. Thomas Sargent, a proponent of the second view, argues that the German reform of 1923 was successful because it created an independent central bank that could refuse to monetize the government deficit and because it included provisions for higher taxes and lower government expenditures. Another way to look at Sargent’s view is that hyperinflations end when people reasonably believe that the rate of money growth will fall to normal levels both now and in the future.

What effects do hyperinflations have? One effect with serious consequences is the reallocation of wealth. Hyperinflations transfer wealth from the general public, which holds money, to the government, which issues money. Hyperinflations also cause borrowers to gain at the expense of lenders when loan contracts are signed prior to the worst inflation. Businesses that hold stores of raw materials and commodities gain at the expense of the general public. In Germany, renters gained at the expense of property owners because rent ceilings did not keep pace with the general level of prices. Costantino Bresciani-Turroni argues that the hyperinflation destroyed the wealth of the stable classes in Germany and made it easier for the National Socialists (Nazis) to gain power.

Hyperinflation reduces an economy’s efficiency by driving people away from monetary transactions and toward barter. In a normal economy, using money in exchange is highly efficient. During hyperinflations people prefer to be paid in commodities in order to avoid the inflation tax. If they are paid in money, they spend that money as quickly as possible. In Germany, workers were paid twice per day and would shop at midday to avoid further depreciation of their earnings. Hyperinflation is a wasteful game of “hot potato” in which people use up valuable resources trying to avoid holding on to paper money.

Hyperinflations can lead to behavior that would be thought bizarre under normal conditions. Gerald Feldman’s book The Great Disorder shows a photo of a small firm transporting wages in a wheelbarrow because the number of banknotes required to pay workers grew very large during the hyperinflation (Feldman 1993, p. 680). Corbis, an Internet source of photos (www.corbis.com), shows an image of a German woman burning banknotes in her stove because doing so provided more heat than using them to buy other fuel would have done. Another image shows German children playing with blocks of banknotes in the street.

More-recent examples of very high inflation have occurred mostly in Latin America and former Eastern bloc nations. Argentina, Bolivia, Brazil, Chile, Peru, and Uruguay together experienced an average annual inflation rate of 121 percent between 1970 and 1987. In Bolivia, prices increased by 12,000 percent in 1985. In Peru, a near hyperinflation occurred in 1988 as prices rose by about 2,000 percent for the year, or by 30 percent per month. However, Thayer Watkins documents that the record hyperinflation of all time occurred in Yugoslavia between 1993 and 1994.2

The Latin American countries with high inflation also experienced a phenomenon called “dollarization,” the use of U.S. dollars in place of the domestic currency. As inflation rises, people come to believe that their own currency is not a good way to store value and they attempt to exchange their domestic money for dollars. In 1973, 90 percent of time deposits in Bolivia were denominated in Bolivian pesos. By 1985, the year of the Bolivian hyperinflation, more than 60 percent of time deposit balances were denominated in dollars.

What caused high inflation in Latin America? Many Latin American countries borrowed heavily during the 1970s and agreed to repay their debts in dollars. As interest rates rose, all of these countries found it increasingly difficult to meet their debt service obligations. The high-inflation countries were those that responded to these higher costs by printing money.

The Bolivian hyperinflation is a case in point. Eliana Cardoso explains that in 1982 Hernán Siles Suazo took power as head of a leftist coalition that wanted to satisfy demands for more government spending on domestic programs but faced growing debt service obligations and falling prices for its tin exports. The Bolivian government responded to this situation by printing money. Faced with a shortage of funds, it chose to raise revenue through the inflation tax instead of raising income taxes or reducing other government spending.

Michael K. Salemi is an economics professor at the University of North Carolina in Chapel Hill.

Bresciani-Turroni, Costantino. The Economics of Inflation: A Study of Currency Depreciation in Post-war Germany. New York: Augustus M. Kelley, 1937. A readable classic originally written in Italian.

Cardoso, Eliana A. “Hyperinflation in Latin America.” Challenge (January/February 1989): 11-19. Interesting and accessible.

Federal Reserve Bank of San Francisco. “The Optimal Rate of Inflation.” FRBSF Economic Letter 97-27, September 19, 1997. A very readable overview of theoretical analyses of the welfare effects of inflation.

Feldman, Gerald. The Great Disorder. Oxford: Oxford University Press, 1993. Source of the wheelbarrow picture.

Graham, Frank D. Exchange, Prices, and Production in Hyperinflation Germany, 1920-1923. New York: Russell and Russell, 1930. Readable with a focus on data.

Holtfrerich, Carl-Ludwig. The German Inflation 1914-1923: Causes and Effects in International Perspective. New York: De Gruyter, 1986. Written by an economist who worked with German archives.

Sargent, Thomas J. “The Ends of Four Big Inflations.” In Rational Expectations and Inflation. New York: Harper and Row, 1986. Sargent explains in detail why fiscal reform is needed to end hyperinflations.

Salemi, Michael, and Sarah Leak. Analyzing Inflation and Its Control: A Resource Guide. New York: National Council on Economic Education, 1984. Designed to help high school teachers teach about inflation.

Bomberger, William A., and Gail E. Makinen. “The Hungarian Hyperinflation and Stabilization of 1945-1946.” Journal of Political Economy 91 (October 1983): 801-824.

Cagan, Phillip. “The Monetary Dynamics of Hyperinflation.” In Milton Friedman, ed., Studies in the Quantity Theory of Money. Chicago: University of Chicago Press, 1956.

Fischer, Stanley, Ratna Sahay, and Carlos A. Vegh. “Modern Hyper- and High Inflations.” Journal of Economic Literature 40, no. 3 (2002): 837–880. A comprehensive look at modern episodes and theory.

Salemi, Michael. “Hyperinflation, Exchange Depreciation, and the Demand for Money in Post World War I Germany.” Ph.D. diss., University of Minnesota, 1976.

For more on the “optimal” rate of inflation, see Timothy Cogley, “What Is the Optimal Rate of Inflation,” FRSBSF Economic Letter 97-27, online at: http://www.sf.frb.org/econrsrch/wklyltr/el97-27.html.

## FT Alphaville » ‘Some useful things I’ve learned about Germany’s hyperinflation’

That’s from Dylan Grice — über-bear Albert Edwards’ sidekick at Societe Generale.

He’s done a review of inflation during the Weimar Republic inflation in his latest Popular Delusions’ note. Prussian central banker Rudolf von Havenstein developed a habit of monetising Germany’s debt during the First World War, eventually leading to massive bouts of hyperinflation:

Amazingly, von Havenstein got away with the move largely because a school of economic thought at the time held that increasing money supply had nothing to do with the rate of inflation. Instead Germans were told the high rates of inflation were all down to external factors; foreigners to be exact, and the reparations Germany had to pay them. Oh, and a hefty portion of blame was laid on speculators too.

It’s an interesting historical economic rundown, but you can probably see where Grice is going with it:

I don’t want to overplay the parallels. In fact, there is one very clear difference between the hand Von Havenstein had to play then and those today’s central bankers have to play now, namely the stability of today’s political climate. Clearly this can change, but the class warfare, nationalistic xenophobia and revolutionary spirit poisoning the political atmosphere of 1920s Germany is at the very least dormant today, and certainly not meaningfully visible across the political landscape. But let’s not ignore the parallels either: as is the case for today’s central bankers, Von Havenstein was faced with horrible fiscal problems; as is the case for today’s central bankers, the distinction between fiscal and monetary policy had blurred; as is the case for today’s central bankers, the political difficulty of deflating was daunting; and as is the case for today’s QE-enthralled central bankers, apparently respectable economic theory reassured him that he was doing the right thing.

One might think that the big difference is that today we have a greater expertise. Surely we understand what happens when deficits are financed with printed money, and that it is only backward and corrupt states that don’t know any better, like Bolivia and Zimbabwe? But just a few years ago didn’t we think that it was only backward and corrupt states that suffered banking crises too?

And anyway, how could Von Havenstein not have known that the continued and escalating printing of money to fund government deficits would cause inflation? The United States experience of unrestrained money printing during the Civil War had been well documented, as had the hyperinflation of revolutionary France in the late 18th century. Isn’t it possible that, like today, he was overconfident in his ability to control his creation and in the economic theory which told him such control was possible? Certainly, in an article in the New York Times on the eve of the First World War, again from Liaquat Ahamed’s book, there seems to have been evidence of the general optimism that there would be no “unlimited issue of paper money and its steady depreciation … since monetary science is better understood at the present time than in those days.”

The fact is we do understand the economics of inflation. Despite what economists everywhere say about being in uncharted territory’ with QE, we know that if you keep monetizing deficits eventually you get inflation, and we know that once you’re on that path it can be extremely difficult to get off it. But we knew that then. The real problem is that inflation is an inherently political variable and that concern over debt sustainability and unfunded welfare obligations leaves us more dependent on politicians than we have been in many decades. Frank Graham concluded his 1930 study of the Weimar hyperinflation with the following observation, which I think is as ominous as it is apt today:

“The mills of international finance grind slowly but their capacity is great. It is also flexible. The one condition is that the hoppers be not unduly loaded in the effort to get the whole grist from a single grinding. So much for the economics of the question. What politics has in store is, however, an inscrutable mystery. It can only be said that such financial difficulties as may occur will almost certainly arise from political rather than from economic sources.”

Related links:
Deflation dead and deader, Federal Reserve style – FT Alphaville
Of bonds and stocks and the Weimar Republic - FT Alphaville

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