A cultural history of inflation in America

In the course of researching higher education costs in America back to the middle of the 19th century, I discovered something that flew in the face of what I had always assumed about how inflation works in a money economy. What I assumed was that a moderate amount of price inflation is normal — that is, continual rather than episodic — in such economies, and that deflation is rare. Furthermore, I thought (to the extent that unexamined assumptions can be called thinking) any significant or prolonged deflation is an economic disaster, and is something to be feared and avoided even more than hyper-inflation…..As many readers no doubt already know, this historical view of inflation and deflation in America — which I suspect, based on my study featuring an N = 1, is quite widespread — is totally wrong.

You have to give Campos credit for writing this. But what interests me is the question of why there’s been this forgetting. My guess is that it’s mostly because of decades of unanswered anti-inflation propaganda from the right, combined with the standard contempt of educated liberals for the inflationist (I say “reflationist”) Populist Party.

The most important single issue for the 1890s Populists was their opposition to the deliberate deflation of the American currency under the slogan “sound currency”.  Enabling foreign trade and protecting the fortunes of property-owners and creditors were the conservatives’ political goal, and deflation was their method.  The mainstream theoretical understanding of the issue was very poor, but they could deflate the currency passively just by letting the money supply grow more slowly than the economy as a whole. The gold standard did this, because the supply of gold was fairly static. (With a fetishism worthy of the Huns who buried golden artifacts with their great kings, many credited gold itself with this result).  Deflation gave the past (old money) control over the future,kept debtors in bondage or drove them to bankruptcy, and also slowed the growth of the economy. (Discovery of gold in Alaska actually did slightly reinflate the currency after 1898, which relieved the pressure and was one of the factors leading to the demise of the Populists).

The Populists have been ridiculed for a century as funny-money cultists, but the real cultists were the mainstream gold standard thinkers, whereas the greenbackers among the Populists were precursors of contemporary money policies. (That’s why it’s so annoying when goldbugs like Ron and Rand Paul are allowed to portray themselves as populists).

But above all, we’ve been barraged with decades of rightwing propaganda about the horrors of inflation, but no public attention at all has been paid to the equal horrors of deflation. Elite Democrats are enthusiastic about the gap between the politics of consent and the politics of governance and renounced populism long ago,  so they don’t go public about their reasons for whatever it is that they’re doing, and many of them are inflation hawks anyway. But when you do this kind of thing, there’s always the chance that your concealment will confuse the elite of the future.

Greider, William, Secrets of the Temple, Simon and Schuster, 1987.

Nugent, Walter, Money and American Society, 1865-1880, Free Press, 1968.

Friedman, Milton, A Monetary History of the United States, 1867-1960, Princeton, 1963.

Friedman, Milton, Bimetallism Reconsidered, Hoover Institute, 1989.

Mihm, Stephen, A Nation of Counterfeiters, Harvard, 2007.

Ritter, Gretchen, Goldbugs and Greenbacks,  Cambridge, 1997.