would start to accept other types of hard currencies like the us dollar. if there is a shortage of those hard currencies, people would invent their own currencies. in germany, with that hyper - inflation in which prices rose by 2 % every minute, german mark ceased to function as money. instead, people started to use cigarettes, chocolate bars or empty bottles as the medium of exchange. then, there is the story of those two brothers who inherited a sizeable wealth from their father. one being a reputed investor used his endowment to build a substantially large portfolio of investments. the other was a drunkard and used the entire amount for drinking. thus, he ended up with a houseful of empty bottles. the story goes on saying that germany was hit by hyper - inflation reducing the value of the entire investment of the son who adopted prudential policies to zero. but, the drunkard became a millionaire overnight, because his empty bottles now became money. a similar amusing story relating to bolivian inflation in mid 1980s takes a different form. since prices are rising at such a high rate, it became necessary to negotiate and agree on a price before undertaking even a very simple transaction. the story says that before a person takes a haircut, he would agree a price with the barber. but, halfway through, the barber would stop cutting the hair and renegotiate the price. that was because by that time, hyper inflation has raised the prices to a still higher level. as a result, the original contract price no longer becomes valid. economic costs of inflation the above stories, though invented to amuse people, teach us some very valuable lessons. first, uncontrolled inflations erode the confidence of people in the domestic currency. as a result, governments lose the control over money and fail to use monetary policy to curb inflation. second, people move away from long term contracts and would be concerned only about the passing moment. salaries, earlier paid monthly would become payable first fortnightly, then weekly and daily and finally hourly. it would entail a tremendous cost on the employers to meet the demand for paying salaries every hour. similarly, all other contracts would also be very short term contracts. people would not think of the future, but only on the passing moments. this type of short - term behavior on the part of people would cause the economy concerned to collapse on itself due to a lack of long term commitments. inflation normally brings in several other

w a wijewardena : why worry about inflation? speech by mr w a wijewardena, deputy governor of the central bank of sri lanka, at the central bank of sri lanka, colombo, 25 may 2007. * * * inflation, a continuous and steady rise in the general price level, is, by any standard, the public enemy number one. by the same token, hyper - inflation, an increase in the general price level to a very high level within a very short period of time, is a killer, akin to a mass destruction weapon. mr. gideon gono, governor of the reserve bank of zimbabwe, a country with an inflation rate of more than 3700 %, equated his country ’ s inflation to an economic hiv, a situation where people would die en masse. this reference eloquently amplifies the gravity of the cost of inflation which a country has to bear. why public enemy number one? from the point of view of economics, there are usually two declared public enemies : inflation and unemployment. of the two, inflation ranks higher. this is because inflation hurts everyone alike : bankers, businessmen, workers, consumers and so forth. you cannot escape it unless you are smart enough to beat it by raising your income faster than inflation. in contrast, unemployment which is also a serious problem, disadvantages only the unemployed. that category is only a segment of the society. hence, inflation is a bigger public enemy than the unemployment. when one compares it with other public enemies like drug abuse or terrorism, one would still find that those issues would also affect only a segment of the society at any given time. since inflation affects everyone and people have limited prospects of escaping it, it is considered as the public enemy number one. some amusing stories about inflation in the recent history, there have been many countries which have been hit by hyper inflation. of them, the most prominent case has been the hyper - inflation in germany after the first world war, where inflation accelerated to 1, 000, 000 % per annum. other noteworthy examples are bolivia ( 25000 % p. a. ) ; russia ( 2000 % ) ; israel ( 1500 % ) ; turkey ( again 1500 % ) and currently zimbabwe ( 3700 % and still rising ). when prices rise at these high rates, the first casualty would be the currency of the country. no one would like to accept the domestic currency, because its value would fall by the minute. instead, people