[Market Economy Guide] Monetary Expansion and Inflation

“If the government prints money recklessly, brutal inflation follows… the Zimbabwe dollar and the dangbaekjeon issued during King Gojong’s reign are typical examples”

Zimbabwe and 200 million percent inflation

Why did Zimbabwe issue such extraordinarily high-denomination banknotes? The reason was severe inflation. When Zimbabwe’s economic conditions worsened due to the worst drought of the 1990s, it pushed ahead with land reform, and to secure the necessary funds, the government began printing money indiscriminately. On top of that, government control policies—including price controls, foreign exchange controls, and import-export controls, which had been strengthened since the early 2000s—seriously distorted the real and financial economy, and Zimbabwe recorded negative growth for nine consecutive years beginning in 1999. As a result, Zimbabwe experienced some of the worst inflation in the world, and in 2008, hyperinflation sent prices soaring by more than 200 million percent. At the time, 300 trillion Zimbabwe dollars were worth only about 1 U.S. dollar.

In response, in January 2009, the Zimbabwean government took the drastic step of issuing a new 100 trillion-dollar banknote, but it did not last long. In April of the same year, the government ultimately decided to stop issuing its own currency and adopt the U.S. dollar.

Printing money to finance government spending

This kind of inflationary rise in prices occurs when a government adopts monetary expansion to cover fiscal spending. Korea also experienced severe inflation in the late Joseon period due to Heungseon Daewongun’s monetary expansion policy. Acting as regent after King Gojong’s accession to the throne, Heungseon Daewongun undertook the reconstruction of Gyeongbokgung Palace to restore royal authority, while also seeking to expand the military in preparation for foreign invasion. However, these two projects dealt a massive fiscal blow to the Joseon government, and in an effort to solve the problem, Heungseon Daewongun eventually issued the dangbaekjeon.

Dangbaekjeon literally means “one coin worth 100 yeopjeon,” that is, money equivalent to 100 sangpyeong tongbo coins. But at the time, the actual value of the dangbaekjeon was only about five to six times that of a sangpyeong tongbo coin, so it should originally have circulated as a dangojeon or, at most, a dangyukjeon. However, the face value of the dangbaekjeon was set at more than 20 times its real value, and by issuing it in large quantities, the Joseon government was able to earn a large temporary profit from the gap. But the issuance of the dangbaekjeon ultimately caused the currency’s value to plunge, bringing about severe inflation and the collapse of state finances. As a result, just two years after issuing it, Heungseon Daewongun eventually banned its minting and use.

There is still an expression today that shows how far the value of the dangbaekjeon fell. It is the “ttaengjeon” in the phrase, “I don’t have a single ttaengjeon.” People who suffered from the inflation caused by the dangbaekjeon contemptuously called it “ttangdon,” meaning debased money, because it had drastically reduced the value of money; later this became “ttaengjeon.” As a result, ttaengjeon is still used today to mean “a very small amount of money.”

Inflation is the government’s “act of plunder”

In a society where prices are unstable, uncertainty and economic costs rise, while the vitality and growth potential of economic actors decline. Moreover, if price instability continues, public sentiment becomes politically unsettled, mutual distrust and hostility grow, and social anxiety intensifies. As a result, total output across the economy declines, and economic stagnation becomes unavoidable. That is why price stability is a top policy objective that governments in every country should pursue.

Inflation can also be described as the government invisibly plundering the money held by the people. History is full of cases in which governments, claiming they would revive the economy, expanded the money supply only to leave behind severe economic aftereffects. Therefore, it is important to implement stable monetary policy so that such repeated failures do not occur.

Price stability protects people’s lives in practical ways, including stable living conditions and the protection of property rights. In that sense, price stability shows that the economy is being managed in a just manner.

■ Let’s think about it

There are two ways for a government to increase the money it can spend: collect more taxes or print more money. Of the two, raising taxes is difficult because of taxpayer resistance. But issuing more currency is relatively easy. Political authorities in underdeveloped countries, without thinking about the future, print money recklessly to meet immediate needs. Zimbabwe’s monetary expansion is famous in financial history. The dangbaekjeon issued by Heungseon Daewongun in the late Joseon period is another such example. Compare the two.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 통화 팽창과 인플레이션

Author: Sung-no Choi

Date: 2019-01-07

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=15&idx=11359