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The Military Ratchet

"The military ratchet was the most important single influence in raising prices and reducing the value of money in the past 1,000 years, and for most of that time debasement was the most common, but not the only, way of strengthening the `sinews of war'."

The financial consequences of Alexander the Great, the rise and fall of the Roman Empire, the Viking assault on England, the Norman Conquest, the Crusades, the Hundred Years War between England and France, the Spanish conquest of Mexico and Peru, the aftermath in Britain of the Napoleonic Wars, the U.S. Civil War, and the financing of the two World Wars are all treated.

The importance of war as a cause of inflation increased with the adoption of paper money in the west.

"When modern paper money release prices from their metallic anchors, the military ratchet began to be seen at its most powerful...The `Continentals' of the new USA fell in value by the end of the Revolutionary War to one-thousandth of their nominal value, a process repeated by the Confederate paper which similarly became worthless by the end of the Civil War. The assignats of the French Revolution and the hyper-inflation of the German mark between 1918 and 1924 are simply among the best known of hundreds of examples of war-induced inflation."

The Developmental Money Ratchet

"Second only to war as an engine of inflation is the general acceptance of the need for an ever-expanding supply of money in order to facilitate economic development, a belief which in a weaker and vaguer form long preceded the Keynesian revolution, though it was the Keynesian ratchet which acted as a strong causative factor in the unusually high peacetime inflations of the second half of the twentieth century." (page 647) Glyn Davies cites Sir William Petty and John Law, "the Keynes of the early eighteenth century", in this regard and discusses the fiasco of the Mississippi Bubble to show that the policy temptations facing politicians, governments and the public are not new.

However, he also points out that in certain circumstances this ratchet can work and says "however much the Keynesian revolution may be condemned for its long-run consequences of high and stubborn inflation, Keynes's enormous success in providing cheap finance for the Second World War and in being largely responsible for the inestimable benefits of full employment for the first post-war generation, i.e. for its short- and medium-term benefits, should not be forgotten."

Deflation

Sometimes the supply of money is insufficient to sustain economic activity at the level that would be reached if its productive capacity was fully utilized.

When Alexander the Great conquered the Persian empire he seized enormous quantities of precious metals which were melted down and used for making coins. Instead of causing inflation this gave a considerable boost to economic activity in the ancient world indicating the importance of coinage in revolutionising financial transactions.

Medieval England was much more successful than other major European countries in avoiding inflation, but the author points out that it could be argued that economic growth was sacrificed as a result though at this distance in time it is impossible to determine whether or not its economy was "crucified on a cross of silver" (to paraphrase the American politician William Jennings Bryan who in the presidential election campaign of 1896 made a famous speech about mankind being crucified on a cross of gold).