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
1 000 000 000 000
100 000 000 000
10 000 000 000
1 000 000 000
100 000 000
10 000 000
1 000 000
100 000
10 000
1000

Price Level

100
10
1
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 2 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