Hyperinflation: Who pays for the disappearing wealth?
1. Hyperinflation. For those at the bottom, inflation often exacerbates the negative impact of their economic life. Inflation is usually caused by governments increasing the money supply. Governments can control inflation by taxing stagnant funds.
When inflation intensifies, the government raises the tax burden on stagnant funds to stimulate consumption and borrowing, thereby increasing the liquidity of funds and inflation, forming a vicious circle. In extreme cases, hyperinflation occurs.
In economics, hyperinflation is an uncontrollable inflation in which the value of money is lost in the event of a rapid rise in prices.
There is no universally accepted standard definition of hyperinflation. Generally, hyperinflation refers to monthly inflation above 50%, but under loose policies, this rate may be lower.
While there is much debate about inflation, hyperinflation becomes more pronounced when there is an unusual increase in the money supply or a large depreciation of money, often associated with war, economic recession, political or social unrest.
Between August 1945 and August 1948, the amount of legal tender issued by the Nanjing Nationalist government soared from 500 billion to 660 trillion yuan, an increase of 1,320 times. In August 1948, the government stopped the issuance of legal tender and issued the "Golden Round Coupon", the original legal tender was exchanged at 1:3 million, which meant that 3 million legal tender could only be exchanged for 1 yuan Golden Round Coupon. The government claims that the issuance of Golden Round Vouchers is capped at 2 billion.
In fact, in less than a year since the issuance of the Golden Round Coupon in August 1948, its circulation has exceeded the original limit by tens of thousands of times. At that time, there was a situation similar to "fantasy". Printing houses printed paper money day and night, but demand still outstripped supply, so the government had to travel to the United States and Britain to print in large quantities.
According to reports, by May 1949, the Kuomintang government's currency issuance had increased by 144.5 billion times compared to June 1937, while national prices had risen 8.5 trillion times. Some people have compared the purchasing power of 100 yuan of legal tender based on the price statistics of the national government. In 1927, 100 yuan could buy two cows. By 1938, only one cow could be purchased. By 1939, only one pig could be purchased. By 1941, only one bag of flour could be purchased. By 1943, only one chicken could be purchased. By 1945, only two eggs could be purchased. By 1946, only 1/6 bar of soap could be purchased. By 1947, only one briquette could be purchased. By 1948, only two large briquettes of 0.002416 could be purchased. By 1949, only 2.45 parts per 10 million of 1 grain of rice could be purchased.
So, where do these values go? They were plundered, and by whom? They were plundered by the four major families that controlled the bank—Chiang Kai-shek, Chen Guofu, Soong Ziwen, and Kong Xiangxi.
The four families were not wealthy in 1927, but in the course of the counter-revolutionary civil war that followed, they plundered as much as $20 billion. $20 billion back then is about $400 billion today.) On the eve of the founding of New China, the bureaucratic capital of the four major families accounted for 80% of China's capitalist economy, while all bureaucratic capital accounted for about two-thirds of the country's industrial capital and 80% of the country's fixed assets in the industrial, mining and transportation industries. In addition to tax increases, debt, bribery and other means, the indiscriminate issuance of paper money is one of the important means of bureaucratic capital plunder.
"The indiscriminate issuance of paper money promotes speculation and allows capitalists to profit from speculation."
Second, who pays for the disappearing wealth?
1. Between debtors and creditors, inflation will benefit the debtor and disadvantage creditors. Usually, the debt contract of the loan is based on the inflation rate at the time of signing to determine the nominal interest rate. Thus, when inflation that is not overdue occurs, the debt covenant cannot be changed, the real interest rate falls, the debtor benefits, and the creditor suffers. The result is a negative impact on loans, especially long-term loans, resulting in creditors' reluctance to make loans. A reduction in lending affects investment, which ultimately leads to a decrease in investment.
2. Between the transaction and the worker, inflation will benefit the employer and the unfavorable worker. This is because wage growth rates cannot be adjusted quickly under unpredictable inflation, resulting in lower real wages and higher profits, thereby stimulating investment. This is the reason some economists argue for moderate inflation to boost the economy.
3. Between the government and the public, inflation will benefit the government and not the public. Since under unpredictable inflation, nominal wages always increase. As nominal wages rose, the number of people reaching the tax threshold increased, and many entered higher tax brackets, leading to an increase in government tax revenues. However, the amount of tax paid by the public increased, but the actual income decreased. The tax that the government receives from this inflation is called the "inflation tax". Some economists believe that this is actually a government predation of the public. The existence of such an inflation tax is not only detrimental to the increase in savings, but also affects the incentive of private and corporate investment.