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Published by EH.NET (July 2003)

Peter Bernholz, Monetary Regimes and Inflation: History, Economic and Political Relationships. Cheltenham, UK: Edward Elgar, 2003. xi + 210 pp. $85 (cloth), ISBN: 1-84376-155-6.

Reviewed for EH.NET by Pierre Siklos, Department of Economics, Wilfrid Laurier University.

“But I beg of you not to despise monetary history; for I am sure that the monetary policy of a nation is often unintelligible without some understanding of the queer institutional jungles out of which it has sprung.” — D. H. Robertson

The study of monetary economics has, of late, largely left behind any pretensions of caring about the role of monetary aggregates. Typically, the conduct of monetary policy is about setting an interest rate instrument in response to some measure of output and inflation. However, as Peter Bernholz reminds us, inflation in historical terms is still largely about the behavior of the money supply and the varieties of political and other institutions from which monetary policy emanates. The book does not restrict itself to studying the perverse cases of hyperinflation (i.e., inflation rates of fifty percent or more on a monthly basis) where the power of excessive money growth is easy for everyone to see. Instead Bernholz devotes considerable space to attempting to understand what drives policy makers to permit moderate rates of inflation. The definition of moderate inflation is never sufficiently clear but this should not be held against the author. A difficulty of course is that what might be considered moderate in one country could be deemed as excessive in another. Hence, five to ten percent inflation rates would be intolerable in Germany while many Latin and South American countries might consider such an inflation performance to be stellar.

In any event, it is refreshing to see that the interaction of money and politics is not dead and that a good deal of what drives the inflation process across countries and over time can be explained in these terms. Following a general overview of the historical experience with inflation from Roman times to the present Bernholz next considers how inflation is generated under a metallic monetary regime. While the basic analysis will be familiar to all who are interested in metallic monetary standards the book instead highlights what can go wrong especially when politics put pressure on the rulers or policy makers to “beat” the system resulting in inflation. Next, Bernholz considers what he refers to as “moderate” inflation that arises under a paper money standard. Once again the long historical view is taken going all the way back to the first known paper money inflation, namely the one that took place in China under the Ming Dynasty. Once again the message is that there are varieties of moderate inflation rates and these can be explained by political events that drive politicians and institutions to generate more or less inflation than might be economically desirable. A separate chapter asks how moderate inflations are ended and, not surprisingly, the answer is complicated since the menu of available options, from outright institutional reforms to the adoption of a currency board arrangement, are available to policy makers. Indeed, history appears to teach us that policies leading to the end of mild bouts of inflation involve a sequence of policies and that the sequence need not be the same for all countries. Hence, there is no ‘one size fits all’ solution to ending inflation.

Two separate chapters deal with hyperinflations (chapters 5 and 8) and, while much of the material has been covered elsewhere, Bernholz does bring a fresh perspective on the conditions needed to successfully end a hyperinflation even though it is never entirely clear how success is precisely measured. Nevertheless, it is useful to know that there appears to be a threshold level of institutional reforms necessary before a successful end to hyperinflation is declared, even if this reviewer disagrees with the characterization that the ending of the first Hungarian hyperinflation (post World War I) belongs to the successful category while the end to the second Hungarian hyperinflation (post World War II) should be viewed as being unsuccessful. The category of “least” successful ends to high inflation all took place during the 1990s and cast a shadow on the role of the IMF, in particular, as an outside force for good advice on how to conduct monetary policy.

Finally, Bernholz devotes one chapter (chapter 6) to explaining, in both formal terms and in historical terms, that inflation produces forces that lead the public to favor or discard alternative media of exchange. There is, of course, a large literature on the currency substitution phenomenon, and Bernholz does a fine job explaining the operation of Gresham’s Law (i.e., currency substitution under fixed exchange rates) and what he refers to a Thier’s Law (i.e., currency substitution under a floating exchange rate system). Here the volume suspends a direct role for institutional factors and instead highlights society’s continued strong desire for a stable currency as most conducive to providing good economic performance.

All in all, Peter Bernholz has provided us with a highly interesting and illuminating account of the vast sweep of monetary history in easy to read historical terms. The writing is crisp and the knowledge of monetary history is breathtaking. Students of monetary history will no doubt find this a fascinating and useful volume.

Pierre Siklos is Professor of Economics at Wilfrid Laurier University, co-editor of the North American Journal of Economics and Finance, and Associate Director of the Viessmann Centre on Modern Europe. Recent publications include “Inflation and Hyperinflation” The Oxford Encyclopedia of Economic History (2003); “Foreign Exchange Market Intervention in Two Small Open Economies: The Canadian and Australian Experience” (with Jeff Rogers, former MABE student), Journal of International Money and Finance, 22 (June 2003); and The Changing Face of Central Banking: Evolutionary Trends since World War II (Cambridge University Press, 2002).

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