Inflation and World War II

Winston Churchill once said: “that the further backward you look the further forward you can see”. World War II (1939-1945) the largest and costliest war in terms of men and money is seldom linked to inflation. Yet a brief walk back through time brings us to the situation in Europe during 1918 when the cost of World War I had forced belligerent nations to ‘print money’ not backed by productive wealth. In doing so, the governments of Europe made money in circulation worth less and the people suffered because of the reduction in their purchasing power and the lost in their real wealth.

Among the nations involved, Germany stands out as the German government during that time printed huge amounts of currency that made the German mark’s value collapse leading to the German Hyperinflation (followed by a period of deflation) and setting the stage for Adolf Hitler’s assent to power. The German government itself did not encourage inflation but wanted to avoid a post war (World War I) recession, to revive its industrial capacity, and to create high employment.

I am not saying that the sole cause of World War II was inflation but one can see the sequence and chain of events of how high inflation (through the excessive printing of money) led to incontrollable hyperinflation which in turn cause financial and political instability that resulted in the horrors man experienced in World War II. Clearly inflation is a force to be reckoned with and this example alone should be enough to justify the importance of knowing how inflation affects each and everyone of us.

However, is not inflation and World War II a relic of the past? Have not the central banks across the globe proven their ability and their credibility to keep inflation at bay while at the same time promoting economic growth. Even Frederic Mishkin (1997) stated that inflation has fallen dramatically in many industrialized as well as emerging countries reaching a point where many economists arguably regarded as price stability.

            A recent interview with legendary ex-Chairman of the Federal Reserve, Alan Greenspan, stated that the end of the cold war, globalization, the rise of China and the rampant spread of information technology were huge disinflationary forces that helped economic growth, high productivity, and booming markets. However, the time of bliss might soon come to an end as the rate of foreign workers might start to slow while China’s wage-rate growth may start to mount hinting the inevitable rise of exports from China (export prices from China rose in spring 2007 for the first time in years). All these events will spark a rise in inflation and more importantly expectations of inflation that may disrupt price stability in the future.

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