inflation economy?

Question

I'm studying the Gilded Age of the U.S. and I don't understand this line in my text book:

"now afflicted farmer and debtor groups clamored for a reissuance of the depreciated paper money. They reasoned that more money meant cheaper money and, hence, rising prices and easier-to-pay debts."
Context: Loaners wanted deflation, because they didn't want to be payed back in depreciated money.

I just really don't understand the concept of inflation.. and why debtors would want more depreciated money when the price of their debts will increase..

Could someone explain this in simple terms? thanks very much

Answer 1

You owe $1. You borrowed it when $1 would buy a loaf of bread. Would you rather pay it back when a dollar buys 2 loaves of bread or when it buys 1/2 a loaf? Most people would rather pay back 1/2 loaf rather than 2; most borrowers want the money they pay back to be worth less than the money they borrowed. They want inflation (i.e. depreciation of the currency)

You have lent out $1. Consider the same questions. Most lenders would prefer getting back a dollar that buys 2 loaves of bread rather than 1. They want deflation (i.e. appreciation of the currency)

Replace the bread by corn. If you are a farmer whose has borrowed to buy N bushels of seed corn, would you rather pay back N/2 bushels at harvest time or 2N bushels at harvest time?

Yes, it is true that if people anticipate inflation or deflation, they should (do?) factor that anticipation into the interest rate of the loan (this is why people refer to the real vs. the nominal interest rates).

But if the inflation/deflation is not anticipated, it becomes a windfall for some and a major loss for others, at least in the short term.

Of course, there are long term implications as well, but farmers in debt are much more concerned about the short term (surviving until the next harvest) than the long term.

As for the process of creating inflation, printing more money is a good way to do it. If people on average have more money, they will be willing to spend more, so sellers will raise prices.

This is true whether the money is printed (i.e. paper money), created by relaxed reserve requirements (so banks loan out more money with the same deposits), or stolen from some other society (when Spain stole the gold and silver of the New World, it made Spain much richer relative to the other European countries, but it also started a major inflation.

Answer 2

Let's pretend that you woke up one morning and found that the amount of money in your bank account doubled overnight. Then, excited as can be, you went to the department store and found that everything is twice as expensive. Are you better off?

The debtors did not want depreciated money because depreciated money is not worth as much. If you borrow $100 from me today, and then tomorrow the dollar depreciates 50% ($1 yesterday is worth 50 cents tomorrow) This is a good deal for you, because now you owe me only $50 in real terms. That's why debtors don't want to accept depreciated money.