Part One discussed three possible paths to higher inflation: cost-push when the price of an important input ratchets up, leading to higher prices for a host of goods and services; wage-price when an expectation of rising prices leads to a demand for higher wages, leading to higher prices and an inflationary spiral; and finally, a currency crisis where a loss of confidence in the value of money leads to rising prices and, in some historical cases, hyper-inflation. Part 1 finished with the question: what in the current environment might bring about a loss of confidence in the value of money. Part Two attempts some answers.

As stated at the outset, recent increases in spending by governments and in the supply of money from central banks have led to questions about whether these are the harbingers of higher inflation. Because common sense dictates that an increase in the supply of something devalues it, this is not an unreasonable concern.

There are two obvious ways in which the supply of money can increase: unofficially through forgery and officially through policy.

Forgery has a long and, dare I say it, rich history. Counterfeiting, which has been called the world’s second oldest profession, has probably been around since money itself. Before paper currency, coins would be clipped around their circumference with the shavings used to make new coins. For this reason, milling was introduced to the edges to prevent coins from being altered. Another approach was to replace the middle of precious coins with baser metals as happened with the silver denarius in Rome and drachma in Ancient Greece. The arrival of paper money expanded opportunities for forgery, including as a weapon of war.

Lenin is said to have claimed that the best way to destroy the capitalist system was to debauch the currency. He was alleged to have been “obsessed …by a plan for the annihilation of the power of money in the world”, and is quoted as saying, “Men will cease to covet and hoard it so soon as they discover it will not buy anything, and the great illusion of the value and power of money, on which the capitalist state is based will have been definitely destroyed.”

In World War Two, the Nazis used Jewish prisoners to counterfeit British pounds with a view to dropping them from the air …….

Source: https://www.thearticle.com/the-emperors-new-clothes-inflation-and-the-psychology-of-money-part-two

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