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Bernholz, Monetary Regimes and Inflation, 1 [ClearOnMoney]
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Commentary

Bernholz, Monetary Regimes and Inflation, 1

29 May 2010 by Jim Fickett.

This post is a review of the first chapter of Monetary Regimes and Inflation, by Peter Bernholz. Already in this first, introductory chapter it is clear that all material will be treated in an insightful manner and illustrated from the author's broad knowledge of history.

I am going to try doing a book review in a somewhat different style. A book is a rather large document, and most reviews are rather small, so a typical review cannot say very much beyond the superficial. Starting with this post, I will review the book Monetary Regimes and Inflation, by Peter Bernholz (2003, Edward Elgar publishing), a chapter at a time. The goal is to give more of a feeling for what one can really learn from a book.

I knew I was going to like this book from the first two sentences:

Inflation presupposes the existence of money, which evolved as an unplanned social institution by a number of inventions and innovations during a period of perhaps 2500 years. It was fully developed with the introduction of coins in Lydia and Ionia about 630 BC, and in China at about the same time.

Clearly this author is going to be carefully systematic, but not pedantic, and is going to enlighten me along the way, even when treating simple prerequisite material.

Chapter 1 is a short (2 pages) introduction, which mainly defines the key terms. Even at this stage there is something to chew on. High inflation is defined in a rather surprising way:

The borderline between [moderate inflation] and high inflation will be defined with the help of the real stock of money, as given by the stock of money divided by the price level and corrected by the growth of Gross Domestic Product, GDP. Whenever this corrected real stock of money declines during an inflationary process, high inflation begins according to our definition. It is true that this definition does not provide a clear dividing line in terms of a percentage inflation. But it has the advantage that it points our attention to the time from which the public tries to escape the loss of value of their money by reducing its use by a flight into other currencies or commodities.

In the introduction it is also mentioned that debasement of coins occurred at least as long ago as the Peloponnesian Wars (5th century BC). One of the great strengths of the book is that all generalities are illustrated by historical data, events, and quotes. One comes away not just with rules, but with a feel for what drives inflation and related phenomena.