THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 700

668 PA R T V I I Monetary Theory Price Level and Money Supply Index (1913 = 1) 10 000 000 000 000 000 000 000 000 100 000 000 000 10 000 000 000 000 000 000 100 000 000 10 000 000 000 000 100 000 10 000 1000 Price Level 100 10 1920 FIGURE 26-1 Money Supply 1921 1922 1923 1924 Money Supply and Price Level in the German Hyperinflation Source: Frank D Graham, Exchange, Prices and Production in Hyperinflation: Germany, 1920 25 (Princeton, N.J.: Princeton University Press, 1930), pp 105 106 Recent Episodes of Rapid Inflation Only one country has recently topped Germany in the high inflation league In 2008, Zimbabwe s inflation rate went to over million percent officially (but unofficially over 10 million percent) In July, the Zimbabwean central bank issued a new $100 billion bank note That s a lot of zeros The explanation for Zimbabwe s hyperinflation is the same as Germany s during its hyperinflation: extremely high money growth because the weak government of Robert Mugabe was unwilling to finance government expenditures by raising taxes, which led to a very high budget deficit financed by money creation Note that the inflation rate is high in all cases in which the high rate of money growth can be classified as an exogenous event This is strong evidence that high money growth causes high inflation ME ANI N G O F I NF LATI O N You may have noticed that all the empirical evidence on the relationship of money growth and inflation discussed so far looks only at cases in which the price level is continually rising at a rapid rate and so inflation is persistent It is this definition of inflation that Friedman and other economists use when they make statements such as Inflation is always and everywhere a monetary phenomenon This is not what your friendly newscaster means when reporting the monthly inflation rate on the nightly news The newscaster is only telling you how much, in percentage