Hyping the Inflation Rate

Around the cluttered White House offices last week, a new term was being uttered in often hushed terms: hyperinflation. Price rises can no longer be easily labeled creeping or even galloping. Said one nervous Carter aide: "People in meetings are really talking about hyperinflation."

By any historic standard, such talk is still very premature. The alltime inflation record holder is 1946 Hungary, which issued 100,000,000,000,000,000,000 pengo bills worth about $10. Before World War II, a pengo had been worth 200. Germany between World Wars I and II suffered 4 trillion percent inflation, and Germans pushing wheelbarrows of money often valued the wheelbarrow more highly than all the currency inside'. Currently the top inflation rates prevail in Israel, Argentina and Brazil.

Economists differ in their explanation of how a country leaves simply galloping inflation and enters the stratosphere of hyperinflation, where prices may go up 1,000% per month. But all agree there is some inflation flash point at which people become convinced that prices will never stop rising and lose all confidence in their currency. Says former Federal Reserve Chairman Arthur Burns: "At that time it appears that anything is better than holding money. People start putting everything into any tangible good they can find."

The true danger of any inflation, especially hyperinflation, is that it will ultimately destroy the sinews of society: when money loses its value, the wise spend and speculate, while only fools save and invest. The public turns cynical about government, and everything, especially work, appears meaningless. Describing the impact of runaway inflation in 1791 during the French Revolution, Chronicler Louis Blanc later wrote: "Commerce was dead; betting took its place." History's great inflations have almost always been followed by a dictator who promised among other things to restore the currency's value. Napoleon, Hitler and Mao Tse-tun all rode the power on the back of huperinflation.

Such runaway prices and social upheaval could never happen in the U.S.--or could they? Herbert Stein, chairman of the Council of Economic Advisers under President Nixon, six years ago collaborated with his writer son Benjamin on a novel called On the Brink. It describes the aftermath of an OPEC price increase to the then incredible level of $38 per bbl. The populist Federal Reserve chairman decides to help the President, plagued with 25% inflation, by printing money night and day. The result: Coca-Cola sells for $1,350 a sixpack, short cab rides cost $6,000 and wheat is $5 million a bushel. Soon violent rioting breaks out, and thousands die. In both history and fiction, the first step in any government's cure for hyperinflation is to convince the people that it is serious about taking the necessary steps to halt the price explosion.

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