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.
Trollblog 
December 26, 2014 at 4:38 pm
“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.”
Did Krugman dip into this just a little bit, with his pieces about the liquidity trap and what would happen after central bank rates effectively went to zero? I remember a good deal of this concern being “how do we stimulate the economy once that happens”, but also at least a little bit about deflation and why it was so bad.
December 27, 2014 at 11:11 am
«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.»
The last point is the most damaging. If the supply of gold is static, but production increases, then *all* the gains in the increase in production go to the holders of gold.
This means that it is stupid to invest in increasing production: it is much easier to invest in hoarding gold, and then any idiot who has invested in higher production makes that gold more valuable for no effort to the hoarder.
The same effect can happen with other assets than gold: for example during the great property boom/bubble it was far more profitable to invest in rising property prices than in any ordinary business. This is still true in the UK, where thanks to government support investing in higher property prices returns around 160% gross profit per year, which beats any ordinary investment return by a lot.
September 19, 2015 at 10:17 am
I have reread this article and I have been doubly amused by another insight:
«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 I am reminded of L Summers in particular. But also of his more explicit friend B DeLong, who calls himself and friends with pride the “Rubin wing of the Democratic party”.
In his blog he often repeats that the world should be governed by “centrist technocrats”, that is L Summers, P Krugman and himself I guess :-), with slightly amazing flights of fancy as to that:
http://equitablegrowth.org/featured/europe-financial-crisis-great-recession-lesser-depression-greater-depression/
«If Europe’s political masters were intelligent right now, I think they would abandon the euro and their freedom of action in monetary and macroeconomic policy, and bind themselves to obey a joint U.S.-IMF hegemon in international finance, monetary, and macroeconomic policy affairs.»
But their current policy stance is very much for inflation, or more precisely for asset price inflation, as those “technocratic centrists” seems to think that prosperity trickles down from booming capital gain for the rich.
Leading B DeLong to propose to «use monetary policy to validate whatever levels nominal asset prices, at least, reach during the bubble».
Now there is an interesting story about populism: that the majority of voters have gone from being tenants to being rentiers, and populism today means indeed bigger better property prices and cheaper home equity extraction loans. So those “technocratic centrists” could be regarded as latter-day populists :-).