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Subtitle: History, Economic and Political Relationships, Edward Elgar,
Cheltenham U.K., 2003, 210 pgs., index. sources, tables, paperback
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Reviewer Comment -
The author does not include enough attention to ancient and medieval economic
history. And in the chapter in which he does mention some aspects of ancient
history he included mistakes. He does discuss paper money and its impact on
inflation in relation to currency, but does not consider credit. He appears to
consider as 'money' only currency. And he continues the typical myth about
barter . His study of modern monetary inflations is detailed and excellent. But
he cites Gresham's Law a dozen times when discussing currency debasement. It
appears to be his 'all purpose' cause. The 'law' states that 'bad' money will
drive 'good' money out of circulation. He uses this idea repeatedly, but then
he also writes of situation for 'reference' GL - namely that 'good' money drove
'bad' money out of circulation. Does he also believe there are cases of
'reverse gravity'? And is it that 'bad money drives 'good money' out of
circulation or that 'good money' is exported as the necessary exchange for
imports leaving only the 'mad money' to circulate.
The specific cases do have historical records. The idea is that when a
sovereign 'debases' that is mints a new coin with less silver and more other
metal but establishes its official 'value' at the same level, the public will
use the debased currency and horde the old, but where does the old go and why.
But we know that some of the specific cases were that the original 'good'
silver coins were already going out of country to pay for imports - from Rome
to China or from Europe to China - and it was the resulting shortage of coins
for daily use that required the sovereign to re-mint and increase the quantity
of coins. In other cases, it was the sovereign who called in the 'good' coins
and reminted them debased as 'bad' coins. So of course the 'good' coins
disappeared - right into the mint. The book is an econometrics product, full of
math and tables and models.
Since this is the 2003 edition of the book the author could not include
anything about the monetary regime in the 2008 financial crisis. He has
published a new edition in 2015. I do not have this as yet. But Patrick Newman
wrote a review in the Quarterly Journal of Austrian Economics, Vol 19
#2, summer 2016. Newman writes that the only significant changes are in Chapter
2 and Chapter 9. In Chapter 2 Bernholz attempts to answer the question - why a
very large increase in its portfolio, which constitutes MO did not create an
equivalent increase in M2? This may be responsible for the lack of inflation
expected from this increase in the money supply. And Newman notes that Bernholz
did not mention the shift in Fed payments to banks for placing excessive
reserves with the Fed. This is the central thesis of Seglin's book,
Floored!
I have more discussion of this in separate reviews of those two references.
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Chapter 1 Introduction:
The author writes that inflation 'presupposes the existence of money' ... so
'It follows that inflation cannot be older than money'. But these ideas rest on
an assumption that 'value' is measured in relative terms - the relationship
between the 'value' ascribed to a unit of 'money' and the 'value'ascribed to
particular goods and services being considered. This concept is 'monetarist'
theory. Please read Fischer's study of the history of waves of price increases
and decreases in Europe since the 12th century The Great Waves. Along with much data and
extensive discussion, Fischer describes the severan very different 'schools of
historians' in terms of their understanding of the causes of price increases
(inflation) of which the monetarist is but one.
Bernholz does provide a clear definition for what he means as 'inflation'.
"We will use the term 'inflation' only for an increase of the price level
extending over a longer period, usually several years, as measured by one or
several prices indices.' He states the book will describe historical facts
concerning inflations and on that basis explain political and economic causes
of inflation and then develop a macroeconomic model of these relationships.
Finlly he will discuss how inflations can be ended. But Fischer's historical
descriptions indicate the reality is much more complex than this. For one
thing, Fischer's descriptions based on longer historical eras indicate that
waves of extended prices (and declines) of goods and services over Europe as a
whole had noting to do with 'monetary regimes' or with the individual rulers
and their governments.
Basically the problem is that all assessments of 'value' are relative in which
the 'value' of anything is some ratio to the value of everything else on
interest to individuals and society. A standard measure of 'value' is a ratio
between a good or service and a measure called 'money'. But both are constantly
changing. Moreover, when the 'money' used in daily exchange is constituted in
some 'precious' metal the 'value' of the weight of the actual metal is also
changing with respect to the government standard 'value' it assigns to the coin
made of a weight of that metal.
In summary, I don't believe in the 'monetarist' theory of value..
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Chapter 2 - Inflation and monetary regimes:
In this chapter Bernholz begins:
2.1 Inflation: long-term historical evidence
"We turn first to the long-term development of inflation since about 1800
in several countries belonging for decades to the most highly developed
economies of the world. (his graph includes Great Britain, France, Swizerland
and the United States) The graph shows a fluctuating flat line from 1790 to
about 1910, and then a rapidly accelerating rise to 1998 in which France rose
by far the most.
This corresponds to Fischer's (and standard historical assessments) that the
19th century was one of the three eras in Western Europe of deflation and to
Fischer's identification of the20th century as one of the periodic greatest
increasing waves of price increase. His second graph depicts cost of living
increasing in several countries between 1950 and 2000 with all the increase
occuring after 1970-75.
He then infers the following conclusions
1.'an inflationary development can be oberved for the whole period': NO, it
cannot, the wave of increase only occured after 1910. The 19th century
experienced one of the best eras of price stability and even deline due to the
massive rapid increase in productivity and great reducion in the cost of
transportation and communications.
2. 'inflation has accelerated since about 1970': Yes, and the likely reasons
are clear.
3. 'after 1970 two groups of counries show different inflaionary developments'
His answer comes in section 2.3
2-2 description of different monetary regime:He defines a 'monetary regime' as
'the set of rules governing the institutions and organizations which finally
determine the amount of money supplied"
(Note here that according to this definition there were no 'monetary regimes'
during much of European history as there was no organization determining the
amount of money during lengthy periods and multiple independent organizations
each attempting to create money during other eras. Yet there were clearly
observable recuring waves of price increase and decline.)
But Bernholz defines the regimes thusly:
1 "Metallic stndards like gold and silver, or copper, in which coins
circulate, whose nominal face value corresponds to the value of the metal
contained in the coin." (Really? Seems to me that mints produced coins
whose official value was greater than the market value of the metal itself -
called signorage). He mentions this as a posibiliy. His further description is
confusing.
2."In history several weakened metallic standards have
existed". By this he means conditions in which exchange of gold or silver
with bank notes was restricted.
3."A third monetary system is given by the discretionary paper money
standard" By this he means that the monetary authorities can increase
or decrease the quantity of paper money in circulation. His description of the
details of this system is lengthy.
2-3 Monetary regimes and inflation Bernhholz's commentary in this section is,
based on a monetarist conception, and lengthy and convoluted. But his
conclusions follow:
1. "Metallic standards like the gold or silver standard show no or , as we
will see in the next chapter, a much smaller inflationary tendency than
discretionary paper money standards" This may be so, but it does not
consider the other factors during the 19th century
2 "Paper money standards with central banks independent of political
authorities are less inflation-biased than those with dependent central
banks". This also may be true. But the U.S. did not have a central bank
from 1837 to 1913, yet the period was one of stable prices and even deflation.
3. "Currencies based on discretionary paper standard and bound by a regime
of a fixed exchange rate to currencies....." a very lengthy description
follows. Again, likely true but the author's history does not prove it becaue
he ignores many factors besides gold and silver coin.
Bernholz now returns to elaborate on section 2.1 and graphs 1 and 2.
2-4 The inflationary bias of political systems:
In this section Bernholz addresses the question remaining from the previous
section. - "why different monetary regimes show such remarkable
differences in their inflation performances, the hypothesisis advanced that
governments have an inherent bias towrds inflation."
Wow, we don't need elaborate economic theories to answer this. All history
shows that rulers (and everyone else) always have unlimited desires for more.
They simply confiscate production when they are able including by tribute or by
asserting that they own the production of the goods and services. Or they
exchange 'money' that they create and then take it back by taxes.But Bernholz
devotes 3 pages to explain this. But there have been periods throughout history
when prices of goods and services rose in great waves due to the simple laws of
supply and demand, when demand greatly exceeded supply. And these had nothing
to do with either governments or monetary systems.
2-5 The influence of monetary regimes:
In this short section Bernholz notes the obvious. The demands by rulers for
more money even if it involves depreciating the exchange value of the measure
of value and inflation can only be prevented if, as he writes, 'the hnds of the
rulers are bound by an adequate monetary regime or constitution'. No doubt so
far this has not happened and it is a reason the sovereigh considers the
control of money his monopoly. But Bernholz describes the 19th century
'stability' purely in monetary terms and claims that the gold standard
prevented governments (England) from expanding the real supply of money. Read
Lombard Street to refute this.
2-6 Some other characteristics of monetary constitutions:
He continues by asking, "under which conditions is it probable or feasible
that stable monetary regimes emerge.?" But he defers the discussion to a
later chapter.
2-7 Conclusions:
In this section Bernholz asserts seven conclustions.
1. Political systems tend to favor inflationary bias for currencies. Lets amend
that to conclude that such is not limited to currencies but even more to credit
instruments.
2. "All hyperinflations in history have occured during the 20th
century." We do not have sufficent historical data for prior centuries and
regions to prove that correct or not.
3. "Monetary regimes binding the hands of rulers, politicians and
governments are necessary conditions for keeping inflation at bay." Again,
Fischer snows in his 'The Great Wave' that increases in prices have
existed in major waves having nothing to do with rulers or governments.
4. "Metalic monetary regimes, especially the gold and silver standards,
have shown the largest resistance to inflation, followed by independent central
banks in such discretionary paper money regimes." What about exchecker
tally sustems? What about the millenia before central banks existed?
5. "Compared to a regime based on a gold standard, a discretionary
monetary regime with an independent central bank seems to show a smaller
varance of variables like the growth rate of GDP, unemployment and real intrest
rates." Considering the relaltive times in history when monetary regimes
were based on a gold standard and when central banks existed I doubt if there
is enough evidence to base this assertion.
6. "With flexible exchange rates there exist, however,a much greater
variance and mid-term swings of exchange rates arond purchasing power
parities...." No comment
7. "Given flexible exchange rates exist, .... " No comment
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Chapter 3 - Inflation under metallic monetary regimes
Clearly, Bernholz is limiting his research here to societies that based their
medium of exchange on currency - coins. That leaves out a huge part of history.
And it rather predisposes the outcome. For instance, what about waves of price
increases in societies that did not rely on metalic coins or in societies that
did but experienced deflation.
3.1 Inflation caused by an additional supply of the monetary metal
The author writes: "Inflation has probably been a charactrtistc of himan
history since money has been used as a means of payment." Lets make an
exception for the extended eras of deflation and price stability in Western
Europe and ignore unknowns such as Asia. Bernholz describes several well known
events that have mixed assessments by historians. One is the wave of price
increases in Europe in the 16th century. This has been attributed to the
incease of silver and gold that was brought from the new Spanish colonies in
America. But some historians cite the timing of this and report that the price
rise began prior to the arrival of silver and gold, as Bernholz, himself,
honestly notes. According to Adam Smith, what eventually happened is that the
price of silver declined so much that people were eager to get ride of it and
the cost of production in European silver mines versus price of silver forced
local mines to close. He mentions the famous incident in which Alexander The
Great looted the vast Persion treasure and put it into circulation to pay
troops. (No one thinks to ask why the King of Kings did not need to use that
gold himself.) Alexcander's use to pay troops is an example of what some
historians believe is the main origin of coinagte - the intriduction of
mercentary soldiers in Greek and Near Eastern warfare required a mobile and
universally acceptable system of payment.
3.2 The debasement of metal standards by rulers.
Indeed, rulers seem to have a predelicting to'debase' their coinage, by one way
or another.
3-3 Reasons for the introduction and maintenance of stable metallic monetary
regimes.
3-4 Price and exchange controls.
3-5 Consequences of inflation for the real economy.
3.6 Conclusion
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Chapter 4 - Moderate paper money inflations
4.1 The introduction of paper money
4.2 Paper money inflation in Sweden during the 18th century
4.3 Paper money inflation in Massachusetts, 1703 - 1749
4.4 Inflation during the American War of Independence
4.5 Paper money inflation during the American Civil War
4.6 Chinese paper money inflation under the Ming regime
4.7 Conclusion
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Chapter 5 - Characteristics of hyperinflations
5.1 Some characteristics of the French hyperinflation
5.2 Hyperinflations are caused by government budget deficits
5.3 Real Stock of money and currency substitution
5.4 Under valuation and currency substitution
5.5 *Other characteristics of hyperinflation
5.6.1 Consequences of high inflation for capital markets
5.6.2 The development of prices
5.7 Economic activity and unemployment
5.8 The political economy of high inflation
5.9 Social and political consequences of hyperinflation
5.10 Conclusion
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Chapter 6 - Currency competitions, inflation. Gresham's Law and
exchange rate
6.1 Introduction
In this chapter Bernholz creates a mathmatical 'model' by which he wants to
describe how an episode of inflation passes through 4 states of a 'cycle'. He
writes: "The four periods contain characteristics corresponding to
stylised facts which have been observed in many hisorical cases of inflation,
and most of which have been described above."
He describes the four phases. Then he writes, "In setting up the model it
will be assumed, as already mentioned, that domestic agents hold both a a
stable and an inflating kind of money and that only the former is a also
demanded in the rest of the world." Page by page he adds more and more
letters that are symbols of various constants or variables. And he repeatedly
resurts to 'assumptions'.
I have a gradate degree in engineering and science and am well used to
mathmatics in hard sciences. But, frankly, I can not fathom these 'equations'
and math tranformations to undestand if they actually mean anything. So lets
skip the rest of the chapter. He does throw in Gresham's Law here and elseware,
but it has several applications in different circumstances. His example here
and 'model' and that it applies to domestic inflation but somehow in the
context of international trade.
6.2 Empirical evidence for periods one to three
6.3 *The model
6.4 *First period: introduction of paper money
6.5 *Second period: fixed exchange rate and loss of official reserves
6.6 *Third period: Gresham's Law at work
6.7 *Fourth Period: The return of good money
6.8 Conclusion
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Chapter 7 - Ending mild or moderate inflation
7.1 Conditions favoring the stabilization of moderate inflation
7.2 Restoration of stable monetary constitutions after wars at the old parity
7.3 Preconditions for returning to a stable monetary regime at a new parity
7.4 Further discussion of historical examples
7.5 More recent historical examples
7.6 Conclusion
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Chapter 8 - Currency reforms ending hyperinflations
8.1 Introduction
8.2 Political-economic preconditions for initiating successful reforms
8.3 Sufficient economic and institutional conditions for successful currency
reforms
8.4 Characteristics of most successful currency reform: Empirical evidence
8.5 Less and least successful reforms
8.6 The influence of wrong evaluations of reform packages by the public
8.7 Conclusions
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Appendix:
Sources for historical data not identified in the text and literature relating
to different causes of hyperinflation
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Review:
-Dr. Bernholz has published a second edition of this important book in 2015, in
which he left the original chapters alone and added two new chapters. This
edition was reviewed by Patrick Newman in the Quarterly Journal of Austrian
Economics, Vol., 19, No2, pgs.`87-191, Summer, 2016. The reviewer then focused
his comments on these two chapters. He begins by discussing the financial
crisis of 2007-8 and the reactions to it by academic economists. One issue was
the huge monetary expansion the major central banks created and their increase
in the reserves of the major member banks. The purpose was to provide liquidity
and stimulate economic activity. The expectation was fear that this would
generate also massive inflation (in accordance with standard economic theory) -
and debase (depreciate) national currencies. .
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New Chapter 2
In this the author asks - where is all the inflation that was predicted? He
contrasts the significant increase in bank reserves with the very moderate
increase in consumer prices. He suggests seeveral reasons including that banks
did not expand loaning, the money was spent on items not included in the CPI,
the increase in M0 was not passed on to an increase in M2, and 'velocity' of
money declined. Newman notes that Bernholz could have provided more specific
statistics to strengthen his assessment.
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New Chapter 9
In this chapter Bernholz attempts to answer two questions - Why did stable
monetary systems occur prior to an inflation? And, what caused stable monetary
systems to be abolished.
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References
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George Selgin - Floored! A very different explaination for the
period after the financial crisis of 2008
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Patrick Newman - Review of this book in which Newman notes a
shortcoming in Bernholz's analysis
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David Hackett Fischer -The Great Wave A much deeper and more
historically based study of waves of price increase and decrease in European
history.
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Sitta von Reden -[ Money in Classical Aniquity She provides much
more detailed information and resulting analysis of price changes
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Felix Martin - Money: The Unauthorized Biography A much
more detailed history of 'money' not limited to coinage.
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George Selgin - Money Free and Unfree
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Amanda Podany -Mesopotamia She includes much more information on
the components of 'money' and monetary standards in ancient Mesopotamia
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Frederic Mishkin - The Economnics of Money, Banking, and Financial
Markets Fifth Edition
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Frederic Mishkin - The Economnics of Money, Banking, and Financial
Markets Ninth Edition
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Geoffrey Ingham - The Nature of Money
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Ludwig von Mises - The Theory of Money and Credit
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Glyn Davies - History of Money from ancient times to the present
day
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Lawrence White - The Clash of Economic Ideas
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Lawrence White - The Theory of Monetary Institutions
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David Graeber - Debt: The First 5.000 Years
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Michael Hudson - .... and forgive them their debts
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David S. Landes - The Invention of Enterprise
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James Dorn, ed. - Monetary Alternatives
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Nathan K. Lewis - Gold, the Final Standard
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