I thought the non-adjusted prices were interesting. No idea what story it tells if you adjust it, but non adjusted, the prices were essentially the same from 1840-1925.
The data's not available before 1947, but the trend is clear: you're looking at the early part of a compound growth formula (with large annual variability).
There was huge inflation during WWI, as the government sold war bonds.
"The World War I era and its aftermath, 1917–1920, then produced sustained inflation unmatched in the nation anytime since. Prices rose at an 18.5-percent annualized rate from December 1916 to June 1920, increasing more than 80 percent during that period."
>>"There was huge inflation during WWI, as the government sold war bonds."
I'm not sure of what you are saying there, but it can be interpreted like war bonds is the cause of inflation.
It's exactly the opposite. At war, a government have to use all the available resources for the war effort. That will produce inflation, because the war spending is competing with the private spending for the same resources.
A way to avoid it, is for the government to retire money from the private sector. A way to retire money from the private sector is to sell war bonds to the population. If you buy a war bond, basically what you are doing is promising that you will not spend your money until after the end of the war. Normally you will get some interest for your patriotic sacrifice.
Also, for the gold standard fans out there, imagine what would happen if a government can not mobilize all the available resources of the country because it has not enough gold. That would be the most ridiculous way to loss a war.
Also during the Civil War I think. I was just listening to a podcast and they were talking about this. I think it took a couple of decades to get back to the gold standard after.
There’s no connection between falling prices and depression. At least that’s what Milton Friedman concluded in A Monetary History of the United States, even though he initially assumed there would be.
Well, Friedman says inflation is driven by the money supply, which is partly true. But it's also true that a shrinking money supply is associated with both deflation and recession/depression.
The idea of your money purchasing less is just a creature of the last 100 years. It doesn't have to be that way, but basically there has been annual share dilution from the US currency corporation for 100 years, it was chartered by Congress in 1913. In currency contexts this is called inflation. In all other asset classes it is called dilution.
Inflation is not the same as an increase in the money supply ("dilution" as you call it).
Inflation defined as an increase in consumer prices.
Consumer prices are affected by many factors other than the money supply, for example if oil prices rise then it tends to push up consumer prices and therefore inflation even if the money supply were static.
> It doesn't have to be that way, but basically there has been annual share dilution from the US currency corporation for 100 years, it was chartered by Congress in 1913.
Sure, you can build a money system without inflation but that doesn't change that you still have to represent the loss of value via unemployment caused by saving money. i.e. you will need money with an expiration date, negative interest rate or wealth tax.
I don't have a problem with the current reality. I am only pointing out that the current reality isn't fundamentally an absolute reality, just the features of the current epoch of currency which is only 100 years old. This thread was only about why the prices for a long time in the 19th century were not changing much across those 100 years, when in the 20th century things increase. I'm not here to opine about a future alternate system.
>I thought the non-adjusted prices were interesting. No idea what story it tells if you adjust it, but non adjusted, the prices were essentially the same from 1840-1925.
I'd heard that there was no inflation in England in 1914 versus 1614. That's not quite right, but there was a remarkably stable period (for some value of "stable") between c. 1650 and c. 1750, and another from 1820 to 1914.
Youve found one of the secrets that LSE and Chicago school types don't want Americans to know about. A good analysis of the big picture reasons behind this would turn anyone into a conspiracy theorist.
Presumably GC is talking about how modern economists frequently say that inflation is necessary for growth, but restaurant prices staying the same from 1840-1925 (which certainly could not be described as a period of stagnation) seems to be a counterpoint to that claim.
And then extending that, one could make the argument (and cryptocurrency maxis frequently do) that inflation is really only good for the existing upper class, who like it because it makes it easier to pay off their debt (of the "building a factory" variety, not credit cards) and because the wealthy own most real assets (e.g. property) that don't get devalued by inflation.
I haven't done enough analysis myself to say whether I think this argument holds water, but that is the argument I assume GC would make and I've done my best to steelman.
> 1840-1925 (which certainly could not be described as a period of stagnation)
There were plenty of "periods of stagnation" in that time interval, though.
In general, stable money income flows promote economic resiliency far more than stable prices do. This means a rising price level (inflation) when the economy is hit by real-world constraints such as war or disasters, and stable or even falling prices when there is a lot of real growth. Pegging the value of the US dollar to gold led to an economic disaster in the late 1920s as the Banque of France was hoarding a lot of gold in a futile attempt to re-establish "sound" money after WWI. Widespread devaluation in the 1930s made it possible to stabilize nominal income flows again, which had beneficial effects even though it came with some mild price rises.
There are two people A and B. They pay each other $100 every month with net $0 profit. Then A decides, hey I want to do this project that needs $200 to complete, so I will stop buying from B for a month. A now has $200 on his account and B didn't work for a month because there were no customers. A wants to spend $200 on the project and pays B but B can only do a months worth of work. At this point the only way the $200 can represent a claim to 1 month of labor is if productivity doubled or the population grew and we now have person C ready to work on the project.
It's pretty obvious what the problem is. If the value of the money is kept stable while the real world deteriorated (through unemployment) then A becomes a leech on productivity or productivity growth. I.e. the way he is maintaining his savings is by exploiting the slack in the labor force. Thus anyone who wants to save in USD is dependent on an underclass that willingly sacrifices their labor. I don't see how this benefits poor people. I can kind of see how this benefits a middle class founded on exploitation. I definitively don't see how reducing the savings until they reach their real value benefits an upper class. They are the ones that want their money to be stable because it means they can extend debts arbitrarily long into the future at their own whim.
I appreciate your steelmanning, and while I meant it more geopolitically than financially, of course it all boils down to financial policy and it's reasons and justifications both prior to major changes (Bretton woods, The Fed, 1968, 1971 etc) and afterwards. Your steelmanning though has helped me to understand how academics I talk to are likely to be thinking about the topic, so I know now what I need to read up on. Thanks.
That could make some sense in 19tg century, but not today, when "building a factory" debts and real estate are owned by publicly traded corporations that literally anyone could buy shares of.
BTW, that's one of the things that make me so excited about DEFI – bringing even more financial instruments previously only available to the rich for wide masses.
To be honest I think only very limited financial instruments should be available to the masses. I don’t even think people should be able to buy single stocks by default [1]. I think people should basically only be able to invest in broad-ranged low-fee index funds, and I guess funds that shift over time from equities to bonds.
The problem with many financial instruments being available is that, because there isn’t anything very interesting to say about “normal” investment, someone reading about investing (or talking to some financial advisor trying to sell them something) will think that it is sensible to be picking investments in various new or weird instruments. The incentives don’t work for the cover of every issue of Barron’s to say “yep, people should probably just invest in broad-ranged low-fee index funds”[2].
But maybe it is hard to stop people from foolishly getting involved in these sorts of schemes and instead of weird financial instruments they will be convinced to make “totally safe but high interest” loans to obviously dodgy companies.
[1] I might back down from this a bit and allow normal equities but not penny stocks and definitely not options. I’m not suggesting no one should be able to get involved but rather that it should be somewhat inconvenient to do so, eg maybe you need to turn up to some office in person or send in a form and wait 2 months (as opposed to the system of “accredited investors” who just need to be somewhat wealthy, a requirement that cuts out people who could make good decisions while still allowing plenty of dentists to be duped into stupid schemes.)
[2] Maybe Barron’s is a slightly bad example as their focus is on financial markets, but you could imagine instead the personal finance section of a regular newspaper.
