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spite of invading Union armies, the impending military defeat,
the reduction in foreign trade, the disorganized government, and
the low morale of the Confederate army.
Reducing the stock of
money had a more significant effect on prices than these powerful
forces." "
These charts dispose of many widely held explanations of infla-
tion. Unions are a favorite whipping boy. They are accused of
using their monopoly power to force up wages, which drive up
costs, which drive up prices. But then how is it that the charts for
Japan, where unions are of trivial importance, and for Brazil,
where they exist only at the sufferance and under the close con-
trol
of the government, show the same relation as the charts for
the United Kingdom, where unions are stronger than in any of the
other nations, and for Germany and the United States, where
unions have considerable strength? Unions may provide useful
services for their members. They may also do a great deal of harm
by limiting employment opportunities for others, but they do not
produce inflation. Wage increases in excess of increases in pro-
ductivity
are a result of inflation, rather than a cause.
Similarly, businessmen do not cause inflation. The rise in the
prices they charge is a result or reflection of other forces. Business-
men are surely no more greedy in countries that have experienced
much inflation than in countries that have experienced little, no
more greedy at one period than another. Why then is inflation so
much greater in some places and at some times than in other
places and at other times?
Another favorite explanation of inflation, particularly among
government officials seeking to shift blame,
is that it is imported
from abroad. That explanation was often correct when the cur-
rencies of the major countries were linked through a gold stand-
ard. Inflation was then an international phenomenon because
many countries used the same commodity as money and anything
that made the quantity of that commodity money grow more
rapidly affected them all. But it clearly is not correct for recent
years. If it were, how could the rates of inflation be so different
in different countries? Japan and the United Kingdom experienced
inflation at the rate of 30 percent
or more a year in the early
1970s, when inflation in the United States was around 10 percent
The Cure for lnflation
263
and in Germany under
5 percent. Inflation is a worldwide phe-
nomenon in the sense that it occurs in many countries at the same
time—just as high goverment spending and large government
deficits are worldwide phenomena. But inflation is not an inter-
national phenomenon in the sense that each country separately
lacks the ability to control its own inflation—just as high govern-
ment spending and large government
deficits are not produced by
forces outside each country's control.
Low productivity is another favorite explanation for inflation.
Yet consider Brazil. It has experienced one of the most rapid rates
of growth in output in the world—and also one of the highest rates
of inflation. True enough, what matters for inflation is the quan-
tity of money per unit of output, but as we have noted, as a prac-
tical matter, changes in output are dwarfed by changes in the
quantity of money. Nothing is more important for the long-run
economic welfare of a country than improving productivity. If
productivity
grows at 3.5 percent per year, output doubles in
twenty years; at 5 percent per year, in fourteen years—quite a
difference. But productivity is a bit player for inflation; money
is center stage.
What about Arab sheikhs and OPEC? They have imposed
heavy costs on us. The sharp rise in the price of oil lowered the
quantity of goods and services that was available for us to use
because we had to export more abroad to pay for oil. The reduc-
tion in output raised the price level. But that was a once-for-all
effect. It did not produce any longer-lasting
effect on the rate of
inflation from that higher price level. In the five years after the
1973
oil shock, inflation in both Germany and Japan declined, in
Germany from about
7 percent a year to less than 5 percent; in
Japan from over
30 percent to less than 5 percent. In the United
States inflation peaked a year after the oil shock at about
12 per-
cent, declined to 5 percent in
1976,
and then rose to over
13
percent in
1979. Can these very different experiences be explained
by an oil shock that was common to all countries?
Germany and
Japan are 100 percent dependent on imported oil, yet they have
done better at cutting inflation than the United States, which is
only 50 percent dependent, or than the United Kingdom, which
has become a major producer of oil.
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We return to our basic proposition. Inflation is primarily a
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