Posted by Allison on 6 April 2009, 15:07
If you have ever listened to the news you will know that inflation is generally viewed as a horrible word. But what does it mean and how does it affect you?
We all have a general understanding that the price of a lot of things will rise steadily as time goes by. We've also heard the problem which occurs when wages do not rise as much as inflation. This can create a gap between what we are earning and what we need to pay out to cover our living expenses. While the money we carry in our pockets may be worth the same in essence and look no different, we will find over time that it will not go as far as it used to.
But this is not a common problem. Inflation has had a real effect on currencies virtually ever since currencies first came into being - such is the power and various complications that come with them. It seems that if we want to take advantage of the various benefits that organised currencies can give us, we must also take the effects of inflation too.
One of the best examples of the effects of inflation on a particular currency can be seen if we look back to ancient Rome. In reality if you were to resurrect a Roman citizen and show them what our current economy and inflation is like, the whole situation would be very familiar to them. This is because they dealt with rampant inflation during their own times, when the government actually started to make their own fake money to try and bring more money into the country in the easiest way possible.
Roman citizens were taxed higher and higher before this, to try and get the money Rome needed to pay for everything it wanted. While it tried to keep a lid on the effects of inflation, it was fighting a losing battle.
Not surprisingly everything came unstuck eventually and Rome was overthrown. It had lasting effects though; as a result bartering made a comeback in Britain and held out for many decades until coins were reintroduced to become the preferred method of payment once again.
While a soaring rate of inflation would not necessarily cause a country to be overthrown nowadays (although anything is possible) it is still vitally important that governments do all they can to keep inflation within their own country under control. This is easier said than done since there are a wide variety of factors that can affect the rise and fall of inflation; it is rather like a delicate balancing act which can easily be toppled if care isn't taken to keep it under control.
If inflation is allowed to get out of control it changes the value of the currency of that particular country. For example, in Britain you can buy a large carton of milk for around £1. Now if inflation was allowed to get out of control prices would go up and the money you carry in your pockets, wallets and purses would end up becoming virtually worthless. That same carton of milk might end up costing £50!
Now that might sound like an expensive carton of milk, and you'd be right. So what would happen in this situation? After all, if some milk can increase in price by that much, what would happen to our household bills? £50 suddenly wouldn't go anywhere near as far as it used to.
That's when drastic measures need to be taken, and these come in the form of devaluation. This basically happens when a currency goes out of control and loses the steady relationship it should have with other currencies used by other countries.
We've seen what an effect high inflation can have on ancient cities like Rome, but it has made its mark on other countries throughout the years as well. Very recently in 2005, Zimbabwe had to devalue the Zimbabwe dollar, in part due to out of control inflation. There are plenty of other similar examples which litter the history of currencies through the ages.
Inflation also has another pronounced effect on currencies however, even when it is kept under control. The fact is that inflation always continues to rise, by however small a degree. Even when it is not really noticeable to the general public from day to day or even month to month, when you stand back and look at the cumulative effect it has over several years you can see that it is always there.
It is due to the continual rise in prices and inflation that we have ended up waving goodbye to several denominations of coin and even some banknotes over the course of history. This is because their denomination is so low to begin with that the rising prices gradually make these notes redundant. The most recent example of this in Britain was the demise of the half penny – a tiny coin which didn't have too many fans anyway, and it finally met its end in 1984, by which time it had no real value at all.
In a similar vein we also occasionally see the introduction of new coins and banknotes of a higher value, partly to compensate for the lower coins and notes disappearing but mainly to ensure that the higher priced goods can still be easily paid for without using lots of smaller denomination coins or notes.
When you look at the effects that inflation can have on currencies – whether old or new – one thing is certain. It seems as though there is no real answer to the age old problem of inflation, so we should perhaps get used to its presence and learn to work with it rather than fighting it so hard. The ancient citizens of Rome could certainly tell us a story or two of what it can do if we are not careful.