Month: October 2020

In the German hyperinflation of 1923, workers were paid twice a day, and the housewife would stand at the factory gate and rush with wheelbarrows full of million mark notes to buy anything at all for money. Production fell, as people became more interested in speculating than in real production or in working for wages. Germans began to use foreign currencies or to barter in commodities. The once-proud mark collapsed.

Unfortunately, the relatively small price rise often acts as a heady wine to government. Suddenly, the government officials see a new Santa Claus, a cornucopia, a magic elixir. They can increase the money supply to a fare-thee-well, finance their deficits and subsidize favored political groups with cheap credit, and prices will rise only by a little bit!

Deflationary price expectations, then, will lower prices, and inflationary expectations will raise them. It should also be clear that the greater the spread and the intensity of these expectations, the bigger the shift in the public’s demand for money, and the greater the effect in changing prices.

Thus, if people suddenly stop being paid once a month, and instead get paid twice a month, this will lower everyone’s demand for money.

So the threat of gold redeemability imposes a constant check and limit on inflationary issues of government paper. If the government can remove the threat, it can expand and inflate without cease. And so it begins to emit propaganda, trying to persuade the public not to use gold coins in their daily lives. Gold is “old-fashioned,” outdated, “a barbarous relic” in J.M. Keynes’s famous dictum, and something that only hicks and hillbillies would wish to use as money.

To this day, “primitive tribes” will not accept paper money, even with their alleged sovereign’s face printed on it with elaborate decoration. Healthily skeptical, they demand “real” money in the form of gold or silver. It takes centuries of propaganda and cultivated trust for these suspicions to fade away.

Counterfeiting, and the resulting inflation, is therefore a process by which some people–the early holders of the new money–benefit at the expense of (i.e., expropriate) the late receivers. The first, earliest and largest net gainers are, of course, the counterfeiters themselves.

Everyone rushes out to spend their new surplus cash balances. But, as they rush to spend the money, all that happens is that demand curves for all goods and services rise. Society is no better off than before, since real resources, labor, capital, goods, natural resources, productivity, have not changed at all. And so prices will, overall, approximately double, and people will find that they are not really any better off than they were before. Their cash balances have doubled, but so have prices, and so their purchasing power remains the same.

The “dollar” originated as the name generally applied to a one-ounce silver coin minted by a Bohemian count named Schlick, in the sixteenth century. Count Schlick lived in Joachimsthal (Joachim’s Valley). His coins, which enjoyed a great reputation for uniformity and fineness, were called Joachimsthalers and finally, just thalers. The word dollar emerged from the pronunciation of thaler.