NightBlogger

As Bernanke points out, when a country has a government-controlled paper money system, then it can use the printing press to increase the relative supply of domestic currency. As the printing presses crank up, the price of money relative to goods and services falls. In other words, the domestic currency loses value as inflation takes hold. Bernanke’s last sentence is positively chilling; “under a paper money system, a determined government can always generate higher spending and hence positive inflation.” His words are extremely precise, and worth close examination. The qualification “paper money system” is crucial. There are plenty of monetary regimes where the government could not devalue the currency; for example; a gold standard, a silver standard; a fixed change rate; or a currency board. Unfortunately, a paper money system is exactly what we have here in the UK and in the US. More