During the revolutionary war one of the British's espionage tactics was to flood the American market with counterfeit currency to cause mass runaway inflation.

But how would that have worked? I don't believe anyone back in that day had a real handle on how much currency was moving in the market due to limited communication abilities. So how would people know that all of a sudden there was a lot more currency out there and thus their currency was worth less?

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    This is really more of an economics question - and doesn't need communication as you suggest. Local price rises because of increased local fluidity (ie, more currency in hand) driving demand will eventually radiate out. – user13123 May 31 '16 at 5:54
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    To put an example, if you flooded only New York with false currency, people in NY would begin buying all available goods. Prices would rise, and outside traders would find profitable to send goods to New York, leading to less goods and an increased liquidity (due to the money paid by New Yorkers for those goods) elsewhere. All of that would spread the inflation beyond NY. – SJuan76 May 31 '16 at 7:21
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    Inflation does not require that the participants communicate (explicitly) or understand. Whenever the supply of money exceeds the demand for money, inflation results. @SJuan76 explains one mechanism. Pricing is a way of reconciling the value of a good or service to the provider and the consumer; money is just an arbitrary unit. If there is more money available the value will be expressed in higher units; the underlying value remains the same. – Mark C. Wallace May 31 '16 at 8:30

You don't have to know, it just happens. Its basic economics. Supply and demand are intersecting diagonal curves, the intersection of which is the market price.

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As supply of an item goes up, you shove its diagonal curve higher up the supply axis (to the right in the graph above). That puts the intersection between the two lower on the price axis. In short, increasing the supply of anything causes its market value to drop.

Paper money is a stand-in for general goods, and thus it can be graphed just like any of them with supply and demand curves.

This has nothing to do with perception. Public perception might affect the "demand" curve, but not the supply curve. That one's just simple math.

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