Student Essay on An Examination of Inflation

An Examination of Inflation

Summary:   Inflation not only impacts a nation monetarily; it also has a large social impact on the people and businesses within an economy, and its overall effect can drive an economy to the point of collapse. An examination of historical examples, including Weimar Germany, 1970s Argentina, 1980s Brazil, post-Vietnam America, and China, can prepare an economy facing the threat of present-day inflation and teach its participants what to avoid and what can be done.

Inflation is a large part in the economic well being of a country along with the social well being. The definition of inflation is the general increase in the prices of goods and services in an entire economy over time. The effects that inflation causes can weaken an economy to the point of collapse. Inflation and hyperinflation can have a tremendously negative affect on an economic society as seen in post WWII Germany (The Weimar Republic), 1970's Argentina, 1980's Brazil, post Vietnam War in America and the Peoples Republic of China, all economies that have fixed their economic and social woes created by inflation and its adverse effects. Taking a look at these past examples of inflation can prepare an economy facing present day inflation on what to avoid and what can be done. The economy facing economic hardships can learn how to handle the social impacts, how to create a successful plan that can lower inflation and restore a country to some form of economic balance and how the government influences inflation.

Inflation is thought of mainly as a monetary issue, where in fact it has a large social impact on the people and business in an economy. Inflation can wreak havoc on the way a society lives day to day. Our well being depends on how much income we have, and when inflation occurs those who do not have a COLA clause written into their contracts may find themselves in a great time of need. A COLA clause will help the worker in a time of economic downturn and high inflation because their pay increases according to inflation. People living on a pension are the most likely to suffer from the results of inflation as they are on a fixed income, meaning their paycheck does not reflect the current inflation rate. A worker without a COLA clause will have a total income that does not move with the inflation of the price of goods needed to maintain a certain standard of living. Food rioting occurred in Argentina during their time of mass inflation in several major cities as a protest over the countries collapse. Mothers were sending their children to the supermarkets to grab as much food as they could swallow. Being forced to tell your children to go out and steal to make sure their bellies were full caused many problems in Argentina. All this resulted from a high inflation rate that was not mirrored by a new nominal income rate . People were left to beg and do anything to get the basics to stay alive. The opposite end of the spectrum is cash hoarding; people do not spend money and therefore do not inject it back into the economy. An example is the Peoples Republic of China, where the government enacted stiff wage and price controls after hyperinflation began which causes a form of forced savings, because goods become unavailable and people hoard cash because there is nothing they can actually spend it on. This stops or severely slows the economic flow of a country causing possibly more inflation. The morale of an economy can have a huge downfall during a time of inflation, people become so worried about where the next paycheck is coming from or for how much it will be they drive themselves mad. These pressures can cause adverse effects on a persons home life and their will to live. Many people during times of inflation find it best to commit suicide as the final solution to their economic problems. Johann Hoffmann wrote during the collapse of the Weimar Republic of a '65 year-old merchant Lorene Trunk [who] shot himself in his bed' saying he too was a victim of the hard times caused by massive inflation in the country. The social effects of inflation are hard felt everywhere, but no matter which type of government a country has the possibility of inflation is always there. However there are numerous ways to combat and drive down inflation.

Plans and actions are bountiful in the world of economic inflation, from price and wage freezing to privatization of previously state run industry. Brazil is a prime example of the large scale privatization of formerly state run industry. In 1990 a radical effort was put into place by the Brazilian government. They planned to reduce hyperinflation by reducing the government controlled direction of the economy, and place price freezing in effect as well. This worked out well for the inflation in Brazil at the time, but it hit hard in the middle and upper classes, causing it to be widely unsupported. A theory about inflation is the Monetary Theory which states the increase in the supply of money at a rate higher than that of the size of the economy will cause an increase in inflation. For those who base their economic ideals on the monetary theory the way to reduce inflation rests on monetary and fiscal moderation. The government in these times must neither make it too easy for the public to borrow money, and they themselves can not excessively borrow. The solution in the mind of someone who believes in the theory may be hard to comprehend, because the government is known for its large scale borrowing. In Brazil during the 1980's the world saw a huge jump in inflation. Cardoso introduced the Real unit of Value in 1990- the real unit of value or URV for short was the equivalent to one US dollar at that time. Using a two step plan, Cardoso was successful in stabilizing the value of the URV to that of the cruzeiro so that day by day the value increased until the URV and the US dollar were similar. Secondly all contracts, prices and salaries were pegged to the URV, not the old cruzeiro. This plan of revaluation worked in Brazil during their time of economic uncertainty, the GDP rose and inflation dropped from the astronomical 1,000% to a mere 6%. Over the long term this plan has seen Brazil bounce back and become a very well run economic nation. During 2001 the GDP rose 1.5%, along with exchanging the large trade deficit for a very nice $2.6 billion surplus. The government of course was the driving force behind the drop in inflation.

The government of any country has a huge influence on inflation, so what does the government do to start or stop inflation? The most renowned example of a governments influence on inflation is 1920's Germany and the Weimar Republic. When faced with the massive war reparations after WWI, Germany had no real way of paying the costs. The German government decided that the only way they had to repay the war reparations was to print more and more money hopefully rebuilding the economy at the same time. The people had little faith in this money and its value, so hyperinflation began. Hyperinflation is in essence run away inflation, when the prices of goods increase so much that there is no sense of a soon reached equilibrium. The hyperinflation of Germany ended with the introduction of the Rentenmark. The government said the new currency had a fixed value and the country accepted what they were told. A government deficit can also either cause or remedy inflation. During the JFK era and post Vietnam the US government's deficit caused inflation within the country. During JFK's reign in Oval office, he proposed tax cuts in reaction to the high unemployment faced after the Vietnam War. His proposal was formed in 1960 but not imposed until 1964, impacting the economies and encouraging inflation during 1965 and 1966, supporting the effects of spending resulting from the Vietnam War. A concept covered earlier was prize freezing, a control measure that the Brazilian Government placed during 1990 where wages were frozen so that they did not reflect the increasing inflation rate and the banks were banned on withdrawals totaling over $1,000. The price freezes were an effort to help repay Brazils large $62 billion debt. The positives of this kind of hurried program always need a negative. In Brazil's case it was the bankruptcy of many small businesses, a drop in the stock market and the loss of state employees. All of this happened because the state privatized much of the industry in Brazil. The banks ate this up and swapped Brazil's loans at a discounted fee for shares in all of the new companies being ushered into the Brazilian economy. Governments have a large influence on the way the economy is run, so it is not surprising to see that they can in act such large scale propositions and plans to help their economy. Sometimes the results can not be predicted until an economy goes through them.

In looking through several historical examples of inflation and hyperinflation a person or a whole economy can focus on what is best for them to do in the event their country goes through a time of high inflation. It is hard to believe that in this day and age anything as drastic and severe could happen, but we are always taught to learn from history so why should we not learn about the adverse and positive effects of inflation on an economy and its well being. As of right now the United States is doing the same thing as 1920's Germany, printing money to cover war cost. From the research on inflation, it is possible that within the next few years the United States could see a dramatic increase in inflation. The social implications of such an event may not yet be known but we can look back and see that the government needs to take some form of afermitive action towards preventing inflation. All of the historical examples point to radical changes in the economy from introducing new money to the well being of people and finally price freezes on many goods and wages that people need. Inflation is a serious issue that has plagued economies for the better part of the last century, take a look back and learn something that may help your future.