The Printing Press

Hyperinflation can result from the excess supply of money into the economy without equal output. It has been observed throughout history that the sudden increase in money supply has resulted in an equal and sudden increase in consumer prices and commodities. According to Train (1985), during the hyperinflation that occurred in France around the time of the French Revolution, “As the torrent of paper poured out of the presses, specie vanished, goods were hoarded, and prices flew upward” (p. 58). As a result of the flooding of paper money into this system, its value relative to tradable goods decreased. In order to prevent this at the onset, the Assemblée of France had established an interest rate of 3 percent to attract specie from those who might otherwise question the value of paper money. The result was that a relative equilibrium was temporarily achieved as supply met demand. Greedy by the inflow of coinage, however, the Assemblée began to print money without regard to the equilibrium of supply and demand. Additionally, they reduced the rate of interest payable to zero. The result of these actions, as has been demonstrated throughout history, was hyperinflation.

References
Train, J. (1985). Famous Financial Fiascos. New York: Clarkson N. Potter, Inc., Publishers



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