Syndicate
Heading Towards Inflation
Governments almost always have debts and are always faced with the temptation of printing money to pay them off. Commonly a government might want to spend more money then what they are receiving through taxes, they can choose to ask for a money loan, or they can simply print p new bills to cover the difference.
Up until recently it was very difficult to print new bills because the greatest part of the paper money in the world was backed up by a precious metal, like gold. Under this system, each piece of money paper that circulated in the economy was worth a specific amount in gold, so that anyone that had cash could redeem it for gold at any given moment. For example, in the United States you could take $35 in cash to the Treasury Department and get an exact ounce of gold.
This gold pattern made it difficult for the government to devaluate money by printing too much money because they first had to get more gold that could back up the money. Since buying gold is expensive, the governments had real limits to increase their money supplies.
However, in 1971, president Richard Nixon took the United States off of the gold pattern and placed on the of legal system course, in which the paper money does not have any backup. People need to accept how it circulates as if it had value. As a matter a fact lex, legis is a Latin term for “law”. So when one says money in legal course, it simply refers to how the government creates money with only emitting an order. The problem with this is that there is not any limit on the number of pieces of paper the government can print to pay off their debts.
Printing money to pay the debts and obligations implies that as soon as the money is available the people spend it, which means that the prices go up and inflation is generated. And if more and more money is printed, people offer the stores even more money for the same amount of goods. Its like a great auction in which all the participants continue receiving more and more money to make offer their supply.
If a government gets used to printing new money quickly to pay off their obligations, inflation can reach or even surpass, in a little bit of time, a monthly twenty or thirty percent, which is a situation that is known as hyperinflation. Economists do not like hyperinflations because they cause a disturbance on every day life and deteriorate the investment climate.
In first term, hyperinflation causes people to lose a lot of time trying to avoid the effects of the climbing prices. During the hyperinflation of the Weimar Republic in Germany, the men that worked in factories received their payment two or three times a day because the money would lose its value extremely quickly. The wives of these factory workers used to wait outside the factories so they could then run to the stores with the money and spend it and buy as much as they could as quickly as they could before it lost its value.
Hyperinflation also destroys the incentive to save money because the only reasonable thing to do with money during a hyperinflation is spend it as quickly as possible, before it losses even more value. During the hyperinflation in Weimar, the people that had life savings in German marks soon found out that what they had accumulated for so long with such hard work was suddenly worth nothing. Those who were thinking about saving for the future lost their entire stimulus because they knew that any money they saved up would lose value in a little time. The lack of incentive to saving cause great financial problems, because if people do not save their money there will not be any money available for the companies to ask for loans for new investments, and without new investments, the economy cannot grow.