Politics, Central Bank, Monetary Regime and Government Bankruptcy

Abstract

The damages and suffering caused by inflation during the course of history are enormous. Still, the worst excesses of inflation occurred not before the 20^th century. This development was a consequence of the further technical development of money from coins to paper money and book money together with changes in the monetary regime or constitution ruling supply and control of money. Sustained inflation has always been a mone-tary phenomenon in the sense that the increase of the money supply is a necessary condition for its occurrence. Moreover, if an increase of the money supply is permanently outstripping the growth of real gross domestic product it is also a sufficient condi-tion for inflation. But that is not the whole story. For it has still to be asked which are the factors and institutional settings that allow the excessive growth of the money supply. And here historical evidence provides a clear answer (Figure 1).

During the rule of the gold and silver standards until the outbreak of the World War I or after the restoration of it until the Great Depression of the 1930s no upward trend of the price level, but only long-term swings can be observed. But after the demise of the convertibility of banknotes into gold at a fixed parity and thus the introduction on a discretionary paper money standard the price level rises dramatically even in the respective developed countries.