LYNN TURGEON, PROFESSOR EMERITUS OF ECONOMICS, HOFSTRA UNIVERSITY, [EMAIL PROTECTED] wrote: > In the fifties, it was assumed that there was only one type of > inflation, demand-pull inflation, one that was obvious in our Civil War, World > War I and World War II. After the two World Wars, there were some notorious > hyperinflations, most obvious in Germany and Russia diring their Civil War. > Both were ended by the issuance of new currencies. > After World War II, the Hungarian hyperinflation was similar to that > found after World War I in Russia and Germany. In the USSR and Germany, there > were monetary reforms to absorb excess purchasing power and the issuance of new > currencies in 1947 and 1948. In France and England, the excess purchasing power > was left in the system (as in the United States) and there were devaluations in > Britain and France (approved ex post by the IMF) and a monetary reform in > France in 1960 when their decimal points were moved two places to the left. > This event occurred at the same time that Khrushchev was waiting for > President Eisenhower in Paris for a return meeting following Khrushchev's visit > to the United States. This summit meeting never occurred due to the downing of > our U-2 in Siberia, but the French experience was absorbed by Khrushchev > producing the monetary reform of January 1, 1961, when Soviet decimal points > were moved one place to the left and the nominal price level was approximately > the same as it was in the 1920s before the industrialization drive. A 10-fold > increase in Soviet prices was wiped out and the Soviet propagandists now > claimed that inflation was not a "socialist problem," but confined to > capitalism. > In the United States, all high school students were taught about the > German experience in 1923 when consumers were taking their money to the stores > in wheelbarrows. In the academy, it was taught that creeping demand-pull > inflation automatically led to hyperinflation of the 1923 German variety. In > the mid-sixties, I noticed that the introduction of medicare and the taxes to > finance it was followed by a little upward blip in the CPI and I began to talk > about "legislated inflation." The most important Keynesian to recognize > inflation coming from higher taxes in an underheated economy was Sir Roy Harrod > in 1969 in letters to the "London Economist" and The New York Times. This > phenomenon was later labeled "supply-side Inflation" by Keynes's contemporary, > Abba Lerner. > The possibility that double-digit inflation might be stabilized rather > than leading to hyperinflation was found in practice in Brazil in the late 50s > and early 60s. The Brazilian experience was contrasted with the Argentinian > experience which followed strict IMF principles that put a higher priority on > controlling inflation with unemployment with a long-term goal of zero > inflation. Ultimately private investment was withdrawn from Brazil (encouraged > by IMF advisers) and a military coup put an end to a progressive Keynesian > experiment combining rapid growth with double-dogit inflation. > Since then, "high inflation" that doesn't necessarily lead to > hyperinflation has cropped up in a number of countries in the 1980s, such as > Israel, Argentina, Brazil, Mexico, Peru and Bolivia, as well as the > transitional economies of Eastern Europe in the 90s. According to Daniel > Heymann (Argentina) and Axel Leijonhufvud (UCLA), "High Inflation" (Oxford > 1995), p. 138, "To put the historic cataclysm that the former communist > countries are undergoing in the same context as the high inflations of Israel > or Argentina is to trivialize it." Professor Leijonhufvud, incidentally, was > brought over to Kirghizia by a former student early in the transition of the > former Soviet Republic. As far as I am aware, he was the only non-monetarist to > advise the former socialist countries, > Poland and Hingary are the two transitional economies that have done > quite well, combining double-digit inflation with respectable growth records > after an initial sharp drop in the growth of GDP associated with the break-up > of COMECON. Both have allowed their currencies to depreciate against the dollar > in the period of high inflation. All of the transition economies have > experienced the collapse of their welfare states due to the inability of the > governments to continue subsidizing this non-market sector. It is important to > recpgnize that the impact of the elimination of these subsidies is similat to a > tax increase, a major component of supply-side inflation. > IMF advisers followed conventional monetarist principles when they > warned the transitional economies to avoid hyperinflation. In fact, the high > rate of price increases during the Gaidar year (1992) was in large part > supply-side inflation coming from the elimination of subsidies and could hardly > lead to hyperinflation. Any attempt to apply demand-pull prescriptions - such > as cracking down on the money supply or failure to pay wages - was therefore > counterproductive just as the application of demand-side prescriptions in the > advanced capitalist system suffering fron supply-side inflation. As H&L, p.8 > remark: "To both eliminate subsidies and raise taxes on a population that has > already seen their nominal assets consumed by inflation would pose a somewhat > rough welcome to the market economy." Thus, "the formerly communist countries > are in for more troublesome straits (than the Latin American countries)" M&L, > p. 142, concluding "that fot the Soviet Union the conditions are far off under > which capital formation in significant volume can resume." > We can thus interpret the continued double-digit high inflation in > Poland and Hingary as a continuation of the dissolution of the welfare state > and basically supply side inflation. > Russia and the former Soviet Republics have been more radical in > allowing their former "seller's market" to become intense "buyer's markets" > with extreme shortages of money and a resort to barter and the dollarization of > the economy. Russia, in particular, has been "successful" in redicing domestic > inflation to single-digits and thereby earned the seal of approval of the IMF > and monetarists generally. > The problem with the Russian radical approach is that it has produced > all of the characteristics of the U.S. Great Depression outside of Moscow. > Conditions in the countryside remind one of the U.S. rural areas in the early > thieties. If our early experience has any lesson, it is extremely unlikely that > the vaunted market can end the stagnation, In a recent speech, Yuri Luzhkov, > the aggressive mayor of Moscow, criticized the "monetarism" that represents the > ideology of the Yeltsin regime. There would seem to be time to draw up a > non-monetarist recovery program before the year 2000 elections. Lynn Turgeon > > tnn Turgeon > > iral areas >S> riral areasOMF > ."747 and 1948. -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 916-898-5321 E-Mail [EMAIL PROTECTED]
In the fifties, it was assumed that there was only one type of inflation, demand-pull inflation, one that was obvious in our Civil War, World War I and World War II. After the two World Wars, there were some notorious hyperinflations, most obvious in Germany and Russia diring their Civil War. Both were ended by the issuance of new currencies. After World War II, the Hungarian hyperinflation was similar to that found after World War I in Russia and Germany. In the USSR and Germany, there were monetary reforms to absorb excess purchasing power and the issuance of new currencies in 1947 and 1948. In France and England, the excess purchasing power was left in the system (as in the United States) and there were devaluations in Britain and France (approved ex post by the IMF) and a monetary reform in France in 1960 when their decimal points were moved two places to the left. This event occurred at the same time that Khrushchev was waiting for President Eisenhower in Paris for a return meeting following Khrushchev's visit to the United States. This summit meeting never occurred due to the downing of our U-2 in Siberia, but the French experience was absorbed by Khrushchev producing the monetary reform of January 1, 1961, when Soviet decimal points were moved one place to the left and the nominal price level was approximately the same as it was in the 1920s before the industrialization drive. A 10-fold increase in Soviet prices was wiped out and the Soviet propagandists now claimed that inflation was not a "socialist problem," but confined to capitalism. In the United States, all high school students were taught about the German experience in 1923 when consumers were taking their money to the stores in wheelbarrows. In the academy, it was taught that creeping demand-pull inflation automatically led to hyperinflation of the 1923 German variety. In the mid-sixties, I noticed that the introduction of medicare and the taxes to finance it was followed by a little upward blip in the CPI and I began to talk about "legislated inflation." The most important Keynesian to recognize inflation coming from higher taxes in an underheated economy was Sir Roy Harrod in 1969 in letters to the "London Economist" and The New York Times. This phenomenon was later labeled "supply-side Inflation" by Keynes's contemporary, Abba Lerner. The possibility that double-digit inflation might be stabilized rather than leading to hyperinflation was found in practice in Brazil in the late 50s and early 60s. The Brazilian experience was contrasted with the Argentinian experience which followed strict IMF principles that put a higher priority on controlling inflation with unemployment with a long-term goal of zero inflation. Ultimately private investment was withdrawn from Brazil (encouraged by IMF advisers) and a military coup put an end to a progressive Keynesian experiment combining rapid growth with double-dogit inflation. Since then, "high inflation" that doesn't necessarily lead to hyperinflation has cropped up in a number of countries in the 1980s, such as Israel, Argentina, Brazil, Mexico, Peru and Bolivia, as well as the transitional economies of Eastern Europe in the 90s. According to Daniel Heymann (Argentina) and Axel Leijonhufvud (UCLA), "High Inflation" (Oxford 1995), p. 138, "To put the historic cataclysm that the former communist countries are undergoing in the same context as the high inflations of Israel or Argentina is to trivialize it." Professor Leijonhufvud, incidentally, was brought over to Kirghizia by a former student early in the transition of the former Soviet Republic. As far as I am aware, he was the only non-monetarist to advise the former socialist countries, Poland and Hingary are the two transitional economies that have done quite well, combining double-digit inflation with respectable growth records after an initial sharp drop in the growth of GDP associated with the break-up of COMECON. Both have allowed their currencies to depreciate against the dollar in the period of high inflation. All of the transition economies have experienced the collapse of their welfare states due to the inability of the governments to continue subsidizing this non-market sector. It is important to recpgnize that the impact of the elimination of these subsidies is similat to a tax increase, a major component of supply-side inflation. IMF advisers followed conventional monetarist principles when they warned the transitional economies to avoid hyperinflation. In fact, the high rate of price increases during the Gaidar year (1992) was in large part supply-side inflation coming from the elimination of subsidies and could hardly lead to hyperinflation. Any attempt to apply demand-pull prescriptions - such as cracking down on the money supply or failure to pay wages - was therefore counterproductive just as the application of demand-side prescriptions in the advanced capitalist system suffering fron supply-side inflation. As H&L, p.8 remark: "To both eliminate subsidies and raise taxes on a population that has already seen their nominal assets consumed by inflation would pose a somewhat rough welcome to the market economy." Thus, "the formerly communist countries are in for more troublesome straits (than the Latin American countries)" M&L, p. 142, concluding "that fot the Soviet Union the conditions are far off under which capital formation in significant volume can resume." We can thus interpret the continued double-digit high inflation in Poland and Hingary as a continuation of the dissolution of the welfare state and basically supply side inflation. Russia and the former Soviet Republics have been more radical in allowing their former "seller's market" to become intense "buyer's markets" with extreme shortages of money and a resort to barter and the dollarization of the economy. Russia, in particular, has been "successful" in redicing domestic inflation to single-digits and thereby earned the seal of approval of the IMF and monetarists generally. The problem with the Russian radical approach is that it has produced all of the characteristics of the U.S. Great Depression outside of Moscow. Conditions in the countryside remind one of the U.S. rural areas in the early thieties. If our early experience has any lesson, it is extremely unlikely that the vaunted market can end the stagnation, In a recent speech, Yuri Luzhkov, the aggressive mayor of Moscow, criticized the "monetarism" that represents the ideology of the Yeltsin regime. There would seem to be time to draw up a non-monetarist recovery program before the year 2000 elections. Lynn Turgeon tnn Turgeon iral areas >S> riral areasOMF .."747 and 1948.
