World inflation and domestic monetary stability

Abstract

Since the end of the Second World War the world economy has, apart from brief interludes of price stability, been in the grip of continuous inflation. No country seems to have managed to escape this world inflation entirely, although a few have made the very greatest efforts to do so. The present article considers why these efforts were in vain and if there really is no defence against “imported” world inflation. The author analyses the four types of policy for avoiding inflation - restrictive monetary and fiscal policy, export of capital, periodic changes in exchange parities and flexible exchange rates. The analysis suggests that the first two are least recommendable in the face of chronic balance of payments surpluses because they do not eradicate the surplus itself and can be sustained for only a relatively short period of time. The latter two do eliminate the external surplus, however, in the face of continuous world inflation, periodic  revaluation does so only temporarily while flexible rates represent a permanent solution. The author concludes that world inflation can be checked only if there is an international monetary order which keeps reserves so scarce that no country feels able to allow inflation to proceed.

JEL: E31, E42, E52, E62