Reply To: Austrians Wrong About Hyperinflation?


Historical analysis, whether of past events or events yet to occur, requires making judgments about the relevance of the different causal factors at work that bring about the effects we wish to analyze.

The same causal factors can be at work in different historical instances but with different intensities peculiar to each instance. If so, the effects can be different.

According to Hans Sennholz, an important causal factor in the German hyperinflation was the delusion held by policy makers that rapidly increasing the nominal money supply was not inflationary because the real money supply was stable or even shrinking. I don’t think that factor is present in any significant strength in America today. Here is Sennholz on the German hyperinflation.

Also, hyperinflation requires runaway inflationary expectations. These, in turn, must be caused by an actual significant and accelerating price inflation, which in turn, must be set in motion by monetary inflation. We don’t seem to be on such a path today and there are plenty of possibilities of avoiding it. (As I’ve suggested in earlier posts, the Fed does have ways of containing the inflationary potential of its build-up of bank reserves. The most obvious being to simply turn the excess reserves into required reserves with a rule change requiring 100% reserve checking accounts.) Here is an interesting article by David Laider on German economists writing during the German hyperinflation explaining the role of inflationary expectations.

Of course, there are several causal factors at work in America today tending toward hyperinflation. But making a prediction of how our history will occur requires more than just pointing this out. It requires making plausible judgments of the likelihood of the strength of those causal factors relative to others that would generate a different set of effects. There are other alternatives policy makers could take instead of direct monetizing of the Federal debt. For example, debt repudiation. It seems to me at least as likely that the Federal government would repudiate on its debt, especially given that a large portion of it is held by foreigners and the Fed itself, instead of nationalizing banks.

In any case, Woods and North aren’t denying the existence of causal factors tending toward hyperinflation or the possibility of hyperinflation, they’re arguing that it isn’t the most likely outcome because other factors not tending toward hyperinflation will turn out to be more significant.