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February 7, 2021 - December 31, 2023
The inflation jokes of the 1950s expressed a growing mood of fatalism about price movements. That attitude encouraged pessimism about the possibility of restraining inflation and caused people to seek other remedies. These new responses caused more inflation and increased its momentum. They also institutionalized its dynamics within entire cultural systems.
In the period from 1938 to 1968, many inflationary floors were built into the American economy: floors under wages, pensions, and compensation for the unemployed; floors beneath farm prices, steel prices, liquor prices, and milk prices; floors for airline fares, trucking charges, doctors’ bills, and lawyers’ fees. Not all of these floors were erected by public authorities. Many were imposed by corporations, labor unions and professional associations. The creation of regulatory floors without ceilings accelerated a dynamic process called the wage-price spiral by conservatives, and the
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Price rises remained comparatively moderate in the North American economy, which restrained the world inflation-rate until 1965. Then they also began to accelerate, partly because President Lyndon Johnson and his advisors made a major miscalculation. The Johnson administration decided to expand public spending for social welfare in the United States and simultaneously fight a major war in Southeast Asia, without a large increase in taxes.
The roots of the price-revolution ran deep in the 20th century. As in every other great wave, the rapid increase of world population and the growth of aggregate demand were the primary cause of price increases.
Neoclassical economists were baffled by stagflation. Some believed it to be an unprecedented anomaly. In fact, stagflation had happened in the later stages of every price-revolution from the thirteenth century to our own time.
All of those arguments were false. Short-term price and wage controls had worked well in recent applications. They were less unfair than unrestrained inflation, and did far less damage to economic growth than anti-inflationary tools such as interest-rate manipulation and policy recessions.
In the United States, the new Carter administration acted on the advice of neo-classical economists and promoted a new idea called “deregulation,” partly in the hope of removing regulatory “floors” under price and wages. The effect of “deregulation” did not as a rule remove the floors themselves. It merely removed control of them from the public to the private sector. Inflation continued, now in company with growing inequalities of income.
The result was the development of rationing, the Communist alternative to inflation.
In the western world, rising prices were themselves a system of market-rationing which allocated scarce resources to those who were willing and able to pay higher prices.
Paul Volcker, a deeply conservative banker who headed the Federal Reserve Board,
Gold could not be held by private citizens in the United States at that time,
“Hostile takeovers” and “leveraged buyouts” multiplied at a rapid rate, often with catastrophic consequences for corporations, jobs, communities, and individuals.
Some of the best and most responsible American companies such as Dayton-Hudson and Phillips Petroleum, outstanding corporate citizens with strong balance sheets, were compelled assume crushing debt in an effort to fight off hostile takeovers. The result of this activity was growing instability in the economic life of the nation.
On the morning after, some experts explained that the collapse was merely a massive correction of grossly inflated stock-prices. They did not ask how the inflation had happened in the first place. Others believed that the crash was caused by programmed trading in stock futures on commodity exchanges where margin requirements were low or nonexistent. Many small investors concluded that financial markets had become corrupt casinos, in which the games were rigged by insiders.
The expectation of rising prices caused prices to rise higher.
but now that price controls were discredited, the remedy for double-digit inflation was double-digit interest.
The rate of inflation slowed from 5.4 percent in 1990 to 3 percent in 1992. Economists and politicians declared that inflation was “under control.” It wasn’t. Even in the midst of the recession, consumer prices continued to climb.
In the United States real wages kept rising through most of the period from 1896 to 1975.21 The cause was to be found in a combination of union activity, minimum wage laws, productivity gains, and social welfare legislation.22 During the early 1970s, that trend reversed. Real wages fell sharply after 1973, dropped again from 1978 to 1982, and declined once more from 1984 to 1996.
When the Federal Reserve Board raised interest rates in the United States, retail bankers instantly passed on the increase to their borrowers. When the Fed lowered interest, the banks were slower to follow suit.
But when the Federal Reserve reduced its discount rates from 9.2 to 3.5 percent (1989–92), the cost of fifteen-year fixed mortgages fell very little, from 9.7 to 7.8 percent. This ratcheting of rates reinforced the upward secular trend.
The work force was increasingly polarized into two labor markets. The upper market offered high pay, fringe benefits, and long tenure; the lower market was for jobs with low pay, no fringes, and frequent layoffs.
In eight years, the Reagan administration increased the national debt more than all previous presidencies combined.
These trade imbalances contributed to monetary disorders. The Nixon administration had deregulated the international monetary system, destroying the Bretton Woods agreement in 1971–73, and allowing exchange rates to float. After it did so the international monetary system became increasingly unstable.
A major problem was the complexity of factors that constrained monetary decision-making—domestic politics, international conditions, class interests, and social policy.
Nevertheless, in the penultimate stage of every price-revolution, price-surges caused crime-surges.
Similar patterns appeared in the use of drugs and drink. In the United States, consumption of alcohol and the use of drugs both tended to rise during the 1960s and 1970s in a series of surges that correlated with the rate of inflation in consumer prices. Similar tendencies had occurred in the United States during the price-revolution of the eighteenth century. The Victorian equilibrium, on the other hand, was marked by a sustained decline in alcohol consumption, and in the United States by a decline in drug use after 1830.
In short, the three trends that Americans identified as the most urgent social problems facing the nation—crime, drugs and family disruption—all correlated with rates of inflation.
As the great wave of the twentieth century approached its climax, the condition of many nations called to mind a Melville novel, or perhaps a Masefield poem. The ship of state raced onward, through high seas and heavy weather. All sails were set, and her helm was lashed to the course that she had long been steering. On the quarterdeck, several parties of myopic navigators squinted dimly at the dark clouds behind them. Somewhere below was their amiable captain, who wanted mainly to be loved by his sullen crew. The first-class passengers amused themselves in their opulent cabins, knowing little
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The history of prices offers many examples. No economic forecaster could have predicted (or even imagined) that a president as conservative as Richard Nixon would become a convert to Keynesian economics in 1971, or that a president as liberal as Jimmy Carter would adopt conservative fiscal policies in 1978, or that any president in his right mind would have embraced the “supply-side” nostrums called Reaganomics in 1981. Each of these individual choices made a difference in the history of prices. All of them were freely made—sometimes defiantly against reason, interest and the economic odds. As
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The central finding may be summarized in a sentence. We found evidence of four price-revolutions since the twelfth century: four very long waves of rising prices, punctuated by long periods of comparative price-equilibrium. This is not a cyclical pattern. Price revolutions have no fixed and regular periodicity. Some were as short as eighty years; others as long as 180 years. They differed in duration, velocity, magnitude, and momentum.
The pattern of price-relatives was specially revealing. Food and fuel led the upward movement. Manufactured goods and services lagged behind. These patterns indicated that the prime mover was excess aggregate demand, generated by an acceleration of population growth, or by rising living standards, or both.
The first stage of every price-revolution was marked by material progress, cultural confidence, and optimism for the future.
This tended to happen when other events intervened—commonly wars of ambition that arose from the hubris of the preceding period.
Examples included the rivalry between emperors and popes in the thirteenth century; the state-building conflicts of the late fifteenth and early sixteenth centuries; the dynastic and imperial struggles of the mid-eighteenth century; and the world wars of the twentieth century.
In every price-revolution, the strongest nation-states suffered severely from fiscal stresses: Spain in the sixteenth century, France in the eighteenth century, and the United States in the twentieth century.
Other imbalances were even more dangerous. Wages, which had at first kept up with prices, now lagged behind. Returns to labor declined while returns to land and capital increased. The rich grew richer. People of middling estates lost ground. The poor suffered terribly. Inequalities of wealth and income increased. So also did hunger, homelessness, crime, violence, drink, drugs, and family disruption.
Finally, the great wave crested and broke with shattering force, in a cultural crisis that included demographic contraction, economic collapse, political revolution, international war and social violence. These events relieved the pressures that had set the price-revolution in motion. The first result was a rapid fall of prices, rents and interest. This short but very sharp deflation was followed by an era of equilibrium that persisted for seventy or eighty years. Long-term inflation ceased. Prices stabilized, then declined further, and stabilized once more. Real wages began to rise, but
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To summarize, each price-revolution developed through five stages: slow beginnings in a period of high prosperity; a period of surge and decline; a time of discovery and institutionalization; an era of growing imbalances and increasing instability; and finally a general crisis. The climax was followed by a fall of prices, recovery of stability, and a long period of comparative price equilibrium.
Each successive price-revolution became less catastrophic in its demographic consequences, but more sweeping in its social impact.
Many scholars, Marxist and non-Marxist alike, believe that the climax of the medieval price-revolution was part of a “crisis of feudalism” and a shift from one stage of production to another.
Patterns such as “price scissors” which Marxist scholars believe to have been caused uniquely by the “crisis of feudalism” also appeared in every price-revolution.
This process might be called the irrationality of the market. It is so in the sense that it converts rational individual choices into collective results that are profoundly irrational. Far from being a benign or beneficent force, the market when left to itself is an unstable system that has repeatedly caused the disruption of social and economic systems in the past eight hundred years.
One consequence was that price-revolutions tend to move more rapidly.
As always, some believe that the best policy is to do nothing and let the market make its own correction. This argument was made as early as the fourteenth century.
The free market in the twentieth century is an economic fiction, much like the state of nature in the political theory of the eighteenth century. Markets today are highly regulated and actively manipulated by both public and private instruments.
Long inflations, or more precisely the social and economic forces that long inflations represent, have caused profound human suffering on a massive scale. The major problem is not inflation itself. It is rather the imbalances, instabilities and inequities that have been associated with inflation.
The historical record of the past eight hundred years shows that ordinary people are right to fear inflation, for they have been its victims—more so then elites. And ordinary people who live in free societies have a special reason for concern.
Important progress has been made in the use of interest rates as a way of regulating an economic system. This method was first applied on a large scale by the Federal Reserve Board as recently as 1966. In three decades it has become an indispensable instrument of economic policy throughout the world.
When inflation threatens, for example, central bankers seek to “cool” the economy in various ways—commonly, by driving up interest rates. The side effects of these methods are sometimes worse than the problems they are meant to solve.
To do so is to discover, for example, that great waves did their worst social and economic damage not by long, slow inflations but by short, sudden price-surges, which always developed in the late stages of every price-revolution.
