Hyperinflation occurred in the South during the U.S. Civil War (1861–1865). Unable to tax effectively in a largely agricultural economy, the Confederate government was forced to print money, eventually creating a money supply of approximately $1.5 billion Confederate dollars.
a. Explain how the rapid increase in the money supply combined with wartime scarcity of goods would cause prices to escalate.
b. In 1864, the Confederate government attempted to reduce inflation by reducing the money supply by approximately one-third. The Confederacy forced paper currency to be converted into bonds by a specific date (or converted at a penalty after that date).What do you expect that the immediate effect of this policy would be?