David R. Henderson  

Harry & Teddy and High Inflation

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A little economics goes a long way

This is from Thomas Griffith, Harry and Teddy, a book about the relationship between Henry R. Luce and Theodore H. White, much of which revolved around their passion and thoughts about China under Chiang Kai-Shek:

And as China's inflation rate got out of hand, space also had to be found on the overcrowded transports to ferry in great bales of new Chinese currency printed in the United States.

Had to? Griffith makes it sound as if the currency was needed to pay the high prices and the high prices were due to something other than the printing of "great bales of new Chinese currency."

This reminds me of something I read years ago, I think in J. Huston McCulloch's short book, Money and Inflation. I think he said that there were actually high government officials in Germany during the 1921-23 hyperinflation who thought they needed to print huge amounts of money to help people pay the high prices and totally missed the fact that it was this money that caused the high prices.


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CATEGORIES: Monetary Policy



COMMENTS (7 to date)
fundamentalist writes:

Mises said the same thing about Germany in the 1920's. And Bresciani-Turani's book on the hyperinflation in Germany quotes some government ministers saying that very thing.

Thucydides writes:

It is said that Havenstein, Governor of the Weimar central bank, believed that when new high speed presses were installed to print currency faster, hyperinflation would be overcome.

Bob Murphy writes:

Aww man, I was going to link to Hummel & Henderson's piece in Investor's Business Daily, arguing that Greenspan wasn't to blame for the housing bubble. But the link doesn't work anymore.

A decent joke, snuffed out before it had a chance to live.

John B. writes:

I suspect the "had to" means "in order for the Chinese government to have cash to spend". In other words, the government could not borrow or tax enough to meet its spending plans. Using its power of seniorage it could however print currency and spend that. In this case the actual printing was done elsewhere (as in the recent Zimbabwian hyperinflation).

Tom Dougherty writes:

"I think he said that there were actually high government officials in Germany during the 1921-23 hyperinflation who thought they needed to print huge amounts of money to help people pay the high prices and totally missed the fact that it was this money that caused the high prices."

David,

I think you are missing something and that is that the demand for money falls during hyperinflation causing the price level to increase even faster than the increase in the money supply. As prices increase at faster and faster rates, people try to get rid of their cash as fast as they can by purchasing goods and services. In Germany, people were paid daily (or even several times a day) and workers would act quickly to spend their cash. Holding on to cash is a bad idea as its value decreases so quickly.

It is during this time when prices are rising quickly that businesses and workers feel as if there is a shortage of money. But as government officials print more and more money to keep up with rising prices the demand for money falls even faster.

So, it is the falling demand for money that causes government officials and businesses to think there is a shortage of money during hyperinflationary episodes. And not to be misunderstood, while I agree that stopping the printing press would be the first thing to do to stop hyperinflation, the phenomenon of prices rising faster than the increase in the money supply creating a "shortage" of money is a money demand issue as much as it is a money supply issue.

Patrick R. Sullivan writes:

Stanton Evans covers the hyperinflation in wartime China in his Blacklisted By History. It seems to have been deliberately induced (or at least abetted) by U.S. Treasury officials who were secretly Communists working for Stalin.

Actions even extending to preventing a $200 million shipment of gold that had been authorized by Congress, from reaching Chiang's China. Two of those officials, Sol Adler and Frank Coe, eventually defected to Mao's China and lived out their lives there.

Bob Murphy writes:

TGGP provides the link to the Hummel & Henderson piece.

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