Zimbabwe Inflation

Whatever be the popular perception, in reality, the tendency has been that the supply increases each and every year. If so, the real effect has to be that the prices should fall every year. In fact, the impact of rising supply has been so overwhelming that in United States, prices have fallen every year from the mid half of the eighteenth century to 1940, with the sole exception of Napoleonic wars, Civil war and World War I. It was only during the wars when Governments ran the printing press at full blast that the prices had to rise. There was of course, paper money in those days, but the exceeding supply offset those increases in paper money.

Even in cases when supply has come down, as in Chile in 1970’s and Uruguay in 1960’s the role of falling supply has been minor in the price rise. The supply had only fallen to a certain extent, but the prices rose thousands of times. Moreover, if we take falling supply as a cause for general price rise, it would imply that the supply has been falling through out every year, as prices have been rising at an amazing pace. That would imply the general disappearance of human civilization, which obviously isn’t happening. Such an analysis would make it obvious that the falling supply is not the reason and something else is wrong.Moreover,if there was free trade,goods would move in to the country where there is falling supply.That would have solved the problem.It should be kept in mind that it is the Governments which are the biggest enemy of free trade.

It should also be taken in to account that supply would fall if there is an extreme rise in aggregate demand. It means that supply would fall with an increase in paper money, which obviously is one of the causes for a fall in supply in many of the cases. Every time an inflation occurs, people scream that there is a fall in supply going on. It is so ridiculous and it would be worth pointing out that in Germany of 1923,after priced had soared hundreds of billions of times, high officials and even the people were blaming it on the shortage of goods and at the same time foreigners were buying German products at a price lower than what would they have had paid in their home country with their own currency or gold. Even in conditions of war, we do not see a general rise in prices due to a decrease in supply.

Some Indian Economists with inadequate knowledge of the subject, like Swaminathan Anklesaria Aiyar was pointing out that inflation is not always a monetary phenomenon and in India, inflation has always occurred after major droughts. But, it is well known that the prices have been rising continuously in India for the past several decades. His argument would imply that there were droughts continuously and material civilization is slowly disappearing, which, obviously isn’t true. It should be apparent now that it is utterly illogical to blame inflation on droughts and famines. It should also be kept in mind that famines are created by Governments.

A fall in supply also can’t explain the debtor/creditor effects of inflation. During an inflation, the debtors gain at the expense of creditors. A fall in supply of goods can’t explain this. Only an exorbitant rise in the amount of paper money can be an adequate explanation for this. Moreover, the argument that a fall in supply is the cause of inflation would imply that a rise in supply would lead to deflation and depression. It is obvious that a rise in supply would lead only to prosperity and this alone would be enough for us to reject a fall in supply as the cause of inflation.