William Bramley/The Gods of Eden/21/215
themselves have never left the coop, yet they have changed ownership twice in one day. This type of exchange was all that paper money was initially created for; but do you see the temptation that it can open up?
If the chicken farmer knows that some time will pass before he must redeem his notes with actual chickens, or that some if his notes will circulate forever and never come in for redemption, he may be tempted to issue more notes than he has in actual chickens, thinking that he will be able to cover all the notes by the time they come back to him. Temptation now gets the best of the chicken farmer.
The chicken farmer has a big family get-together coming up and he wants to impress his in-laws for once by putting on an opulent feast. Down to the market he goes where he writes notes for chickens not yet hatched and stocks up with an abundance of goods from other merchants. Several things can now happen. The chicken farmer will get away with it if he is always able to meet the demand for chickens when his notes come in for redemption. Another thing that may, and often will, occur is that he has so saturated the marketplace with his chicken notes that most people just do not want any more of them, so he must offer even more hens for each trade to make people feel that it is worth their while. He is now writing notes for two or three chickens in exchange for items for which he previously only had to issue single-chicken notes. As these chicken notes circulate, they become less and less valuable because there are so many of them. A vicious spiral ensues: the more notes the chicken farmer issues, the less valuable they become, and the more he has to issue in order to get what he wants. This is known as inflation.
Now comes the worst part.
With more and more notes outstanding, an increasing number of notes will start coming in for redemption. Soon the farmer will see that his true wealth, which is his supply of chickens, is becoming rapidly depleted even though only a small portion of his outstanding notes have come back. To preserve his chickens, he must decrease the value of his notes by declaring that the outstanding notes are now only good for half of what they say. This is called devaluation.
