Resolved Question: Question on inflation and the merits of a barter system?

28/06/09

Say you borrow a dollar from a friend to buy a candy bar. If the value of the dollar increases the next day, so that you can buy two candy bars with one dollar, you could sell the candy bar for two dollars and pay your friend back the one dollar you owe him, because technically you only borrowed one dollar, right?

Now what about the opposite? Remember in pre-WWII Germany how hyperinflation caused people to take their paychecks home in wheelbarrows, and a loaf of bread to cost over a million Deutsch Marks? Imagine a situation like that. If you borrowed 50 thousand dollars from a friend to buy a candy bar, but the next day everything went back to normal, and the candy bar was only worth one dollar, would you still owe your friend 50 thousand dollars, or would you owe him the price of a candy bar?

Surely no one would expect you to pay them back enough money to buy a luxury vehicle when the loan in its time could barely buy a piece of food (ignoring the concept of interest). But then why is the opposite true? From what I remember from high school economics, the government encourages inflation because it makes it easier to pay off debts. That seems to me to be the only merit of inflation. You would think, though, that in a global economy, we would want to deflate so that we could turn what little money we have left into something of value.

But then, both seem like methods of cheating your way out of paying what you owe. Wouldn’t it be easier to say that four strawberries equals one apple, and we’ll give you a new tank for every billion pounds of corn you export to us? I understand that paper currency holds each of those items to a certain value. However, when that value fluctuates from day to day, doesn’t that defeat the purpose?
1. i get that the point of money is liquidation, but then it just becomes another good you have to barter for. if i have a 100-year old piano that i want to sell so i have enough money to buy a new car, i have to find someone i can sell the piano to for a price i like so that i can get the money i need to take to the dealership to buy the car. to me, thats just as bad as trading apples for oranges so you can get mangoes. what say you?

2. the hyperinflation example was just an exaggeration to prove a point. if you dont expect someone to pay you back the ridiculous sum of money when the value of the currency deflates, how can you expect someone to only pay you the dollar amount of a loan when the value of the currency inflates? shouldnt the price of a loan inflate too?

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