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Inflation and Countries Essay

The Twentieth century may be remembered as the century of excess. In every area, more things were done in the Twentieth century than in any other century in history, and in many cases, more than in all previous centuries combined.

The Twentieth century saw some of the most destructive wars in history, the development of the Atomic Bomb, the beginning of air and space travel, the colonization and decolonization of the Third World, the rise and fall of Communism, dramatic improvements in the standard of living, the population explosion, the rise of the computer, incredible advances in science and medicine, and hundreds of historically unprecedented changes. The Twentieth century also produced more inflation than any other century in history. Inflation is nothing new.

Roman rulers produced inflation in Third Century Rome by debasing their coins, China suffered inflation in the fourteenth century when the Emperors replaced coins with paper money, Europe and the rest of the world suffered inflation when gold and silver started flowing into the Old World from the New World in the sixteenth century, and the French and American Revolutions destroyed currencies in each of those countries. EXPLAIN THE INFLATION Nevertheless, as we shall see, the Twentieth century produced the worst inflation in human history.

Every single country in the world suffered worse inflation in the Twentieth century than in any century in history. So what caused this inflation to occur, and is further inflation in the Twenty-first century inevitable? The Nineteenth Century Amazingly enough, the Nineteenth century was a period of deflation, rather than inflation. From the end of the Napoleonic Wars in 1815 until the start of World War II in 1914, there was no inflation in most countries, and in many cases, prices were lower in 1914 than they had been in 1815. Prices fluctuated up and down from one decade to the next, but overall, prices remained stable.

There were exceptions to this rule. The United States suffered inflation during the Civil War, though the United States also went through deflation after the war in order to bring the economy back onto a gold standard. The Confederate States suffered high inflation since they printed money to pay for the war. The eventual collapse of the Confederate States made their currency worthless. Countries were able to minimize the amount of inflation they suffered during the Nineteenth century because currencies were tied to commodities (gold and silver) whose supply increased at rates similar to the increase in output.

Price stability in gold and silver produced price stability for the world. The Nineteenth century was a period of bimetallism. Countries chose to back their currency with either gold or silver. The United Kingdom was on the gold standard from the end of the Napoleonic Wars until 1914. Because the British economy grew faster than the supply of gold, prices fell in Britain during that hundred-year period. Other countries such as France, Russia, Austria, most of Asia, and other countries tied their currency to silver.

Since the supply of silver was growing faster than economic growth, countries on a silver standard had higher inflation rates than countries on the gold standard. Nevertheless, their inflation was modest by Twentieth century Standards. Still, other countries such as the United States, primarily for political reasons, tried to balance themselves between gold and silver by tying their currency to both metals, but in the end, gold triumphed. By the beginning of the Twentieth century, every major country in the world had tied its currency to gold. The result was a century of price and currency stability.

The value of the US Dollar relative to the British Pound Sterling was the same in 1914 as it had been in 1830. Because currencies were tied to gold, fluctuations in exchange rates were minimal, rarely moving more than one percent above or below par. Given this situation, nothing could have prepared the world for the hyperinflations and persistent inflation of the Twentieth century. The purpose of this paper is to both document inflation in the Twentieth century, and to analyze what went wrong. Why will the Twentieth century be remembered as the century of the worst inflation in human history?

How did the Twentieth century differ from the Nineteenth century? Which countries suffered the worst inflation, and why? Which countries suffered the least inflation, and why? And most importantly, will the Twenty-first century be another century of inflation? Or will the world enjoy a century of price and financial stability similar to what occurred during the Nineteenth century? Exchange Rates and Inflation It would have been easy to write this paper if every country had kept data on inflation throughout the Twentieth century. Unfortunately, this isn’t the case.

Most countries only began keeping data on inflation after World War I, and for smaller countries, data often does not exist before World War II. Inflation data before these dates are often estimates based upon historical price data. Moreover, the worst inflationary periods often lack any inflationary data at all. It is easy to keep track of inflation when prices are rising at 2% per annum, but more difficult when prices are doubling on a daily basis. In order to compare inflation throughout the world, we have had to rely upon a proxy for inflation: exchange rates.

The theory of Purchasing Power Parity says that in the long run, differences in inflation rates between countries are transmitted through changes in relative exchange rates. If prices double in one country but remain unchanged in another country, the currency of the inflating country will lose half of its value relative to the currency of the stable country. Otherwise, exports from the inflating country would become so expensive that foreigners could not afford to purchase their exports. For this reason, all inflation comparisons will be based upon exchange rate changes over time.


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