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5 - Monetary Policy: The Illiberal Practice of Inflation Targeting

Published online by Cambridge University Press:  12 October 2022

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Summary

A misplaced obsession with stable prices

Concern about inflation in Germany has a long history. The onset of the Thirty Years War in 1618 triggered an inflationary spiral which contributed to living standards plunging in towns across the Holy Roman Empire. Between 1619 and 1622, real wages fell by more than two thirds in Augsburg in Bavaria, in contrast to just a 5 per cent decrease in Southern England. Furthermore, this dramatic fall in real wages took place largely before the outbreak of hostilities (Kindleberger, 1991).

A plate published in 1620 by Daniel Mannasser and now in the Germanisches Museum provides an indication of the causes of the inflationary spiral. It appears to depict a German mint deliberately debasing coins designed to be taken into other city-states and exchanged for good coins. The good coins could then be brought back and re-coined with greater seignorage – the difference between the face value of coins and their production costs.

This perceived opportunity by principalities to profit and increase their war chests led to a massive increase in the money supply through mint production of an ever-falling value of coinage across the empire. Contemporary accounts depict children playing games in the streets with the worthless coins due to the debasement of the currency (Kindleberger, 1991).

The more recent hyperinflation experienced in 1923 under the Weimar Republic was of a similar origin. The debt burden of war and the onerous reparations imposed at the Treaty of Versailles led the Reichsbank to permit other public authorities and industrial concerns to issue emergency money tokens. This process was exacerbated by the French occupation of the Ruhr which removed a third of industrial output from Germany (Desai, 1981: 18). Once again this resulted in a massive expansion of the money supply and an appalling fall in the standard of living, which stoked calls for rising wages backed up by strikes.

Although the inflation of World War One had been responsible for a 15 per cent fall in real wages for skilled workers, by the end of 1923 this had fallen by nearly 40 per cent (Bry, 1960). The first 100 billion note was soon printed, resulting in worthless paper money burned as fuel due to the widespread shortage of coal.

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All Roads Lead to Serfdom
Confronting Liberalism’s Fatal Flaw
, pp. 75 - 95
Publisher: Bristol University Press
Print publication year: 2022

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