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Money and credit - Ivanov V.M.


11.1. The essence of modern inflation

The term " inflation " (from lat. Inflatio) means bloating. Indeed, the financing of government spending (for example, during periods of extreme economic development during wars, revolutions) through paper money issues with the termination of banknote exchanges led to a “bloating” of money circulation and the depreciation of paper money.

Inflation was characteristic of Russia (1869-1895), the United States during the war of independence (1775-1783) and the civil war (1861-1865), England during the war with Napoleon (beginning of the XIX century. ), France - during the French Revolution (17891791).

Inflation reached a particularly high rate in Germany after the First World War, when in the autumn of 1923 the money supply in circulation reached 496 quintillion marks and the currency depreciated a trillion times. As you can see, inflation is not a product of modernity, it has occurred in the past.

Modern inflation has a number of features. If earlier it had a local character, now it is ubiquitous, global. Previously, inflation spanned a greater or lesser period, that is, it had a periodic character, but now it is chronic. Modern inflation is influenced by two groups of factors: monetary and non-monetary.

Monetary factors include the excess of monetary demand over product supply, as a result of which there is a violation of the requirements of the law of monetary circulation.

Non-monetary factors lead to an initial increase in the costs and prices of goods, supported by the subsequent pulling up of the money supply to their increased level.

In fact, both groups of factors interact, causing price increases for goods or services or inflation.

Depending on the prevalence of factors of a particular group, two types of inflation are distinguished: demand and costs.

Demand inflation is caused by such monetary factors:

• militarization of the economy and growth of military spending. Military equipment is becoming less and less adapted for use in civilian sectors, as a result of which the monetary equivalent opposing military equipment turns into a factor unnecessary for circulation;

• state budget deficit and domestic debt. The deficit is covered by placing government loans on the money market (typical for the United States) or by using an additional issue of non-exchangeable banknotes of the National Bank (in Ukraine);

• credit expansion of banks;

imported inflation . This is the issue of national currency in excess of the needs of trade in the purchase of foreign currency by countries with an active balance of payments;

• excessive investment in heavy industry. At the same time, elements of production capital are constantly extracted from the market, in exchange for which an additional cash equivalent comes into circulation.

Cost inflation is characterized by the impact of non-monetary factors on pricing processes:

• leadership in prices, observed from the mid-60s to 1973, when large companies in industries, when setting and changing prices, were guided by prices set by leading companies, that is, the largest producers in the industry or within the local-territorial the market;

• a decrease in the growth of labor productivity and a drop in production. Such phenomena are characteristic of the second half of the 70s. For example, if the US economy has an average annual rate of labor productivity in 1961-1973. amounted to 2.3%, then in 1974-1980. - 0.2%, and in industry - 3.5 and 0.1%, respectively. Similar processes were characteristic of other industrialized countries. The decisive role in slowing down the growth of labor productivity was played by the deterioration of the general conditions of reproduction caused by both cyclical and structural crises;

• increased importance of the service sector. It is characterized, on the one hand, by a slower increase in labor productivity in the services sector compared with the branches of material production, and on the other hand, by a large share of wages in the total costs of production. A sharp increase in demand for products in the service sector in the second half of the 60s and the beginning of the 70s stimulated its appreciable rise in price: in industrialized countries the rise in prices for services was 1.5-2 times higher than the increase in prices for basic goods;

• accelerating the growth of costs and especially wages per unit of output. The economic power of workers, the activity of trade unions do not allow large companies to reduce wage growth to the level of slower growth in labor productivity;

• energy crisis. In the 70s it caused a significant rise in price of oil and other energy resources. As a result, while in the 60s the average annual increase in world prices for the products of industrialized countries was only 1.5%, in the 70s it was more than 12%.

In general, the dynamics of consumer prices in industrialized countries is characterized by the fact that the growth rate of consumer prices systematically overtakes the growth rate of GNP, which indicates the presence of inflationary processes.