The three forms of inflation…

Dr. Johnson’s Dictionary of the English Language (1755) defined “inflation” as “the state of being swelled with wind, flatulence.”

Yet now:

Inflation. People fear it, policymakers dread it, pundits pronounce upon it. It was high throughout the West in the 1960s, higher in the 1970s, and hyper in the aftermath of World War I. Inflation could rise again.

These are quotations from an article by Professor Rebecca L. Spang – history professor in the ‘flyover’ mid western state of the (University) of Indiana… The essay is very perceptive and is well worth a a read..

All the more so as she is a historian and not an economist!

She says that,

Critics accused the Lincoln administration of “inflating” the country’s money supply—puffing it up overnight with temporary paper…..

When it entered economic usage, then, “inflation” referred not to rising prices but to expanded supplies of money…..

As long as it meant “increased availability of money,” inflation could be understood as facilitating trade, encouraging investment, and even benefiting the poor. Moralizing critics could worry about the corrupting effects of “easy money” on society but policy enthusiasts could counter that more currency in circulation would make it easier for borrowers to pay off their debts. Lawmakers could even be “pro-inflation.”

Thus with our current mountains of Quantitative Easing we are supposedly in the midst of inflation…

And we are in the modern sense, in those areas where QE has been concentrated. Thus the result has been inflated share prices and house prices. But where it has been spent, for example, to facilitate furlough, there is no modern inflation, but the extra supply of money has been used to keep people more prosperous than they would otherwise have been. This is inflation in the older sense.

And also goes to prove that targeting money at people that don’t have enough is not inflationary. If you’re worried about inflation then you are not spending on the right people.

And then she adds another historical landmark:

With Irving Fisher (1867–1947)—professor of economics, committed prohibitionist, proselytizing vegetarian, and first president of the American Eugenics Society—the science of money became mathematical. Noting that “an algebraic statement is usually a good safeguard against loose reasoning; and loose reasoning is chiefly responsible for the suspicion under which economic theories have frequently fallen,” Fisher produced one of the most famous equations of the twentieth century: MV=PT. Looking and acting strangely like another law of expansion and contraction (the ideal gas law, PV=nRT), Fisher’s equation locked money supply and price level together in a statement of identity:

This is probably the origin of economics’ so called physics envy. But of course these equations are dependent on a sociological science, that of economics, (more properly called political economics) being mathematically calculable, when the whole idea which treats economics as an immutable ‘given’ takes no account of how the economic rules are organised to start with. No wonder Irving Fisher’s mathematical calculation of the benefits of Prohibition did not work out too well even (perhaps especially) when it still seems to form the basis of today’s drug policy.

The essay continues:

One could think about “core inflation” in other ways, though. If food and energy are part of anyone’s budget, they make up a far larger percentage of spending in lower-income households. Omitting these two items therefore helps ensure that the FRB’s [Federal Reserve Board] policies respond more to the needs of bankers, lawyers, and politicians—those wealthy enough to be comparatively little affected by the “volatility” of grapefruits and gasoline—than to those with lower disposable incomes.

Good point. And it ties in with the way most people in the West see themselves – as consumers, not producers. Thus, for example the recent doubling of Brazilian coffee prices may be seen as a threat to the Starbucks drinker, but is rather better news for coffee producers.

No longer understood in economic contexts as the act of inflating something, “inflation” is instead a thing that exists out there in the world, a force to be feared and a possibility to dread. Most of us give little thought to how or by whom it is calculated and compiled.

She might have added that ‘inflation’ has become another one of those ‘givens’ that, now we are supposedly an exclusively consumer society is a lurking and ever present danger.

In a sort of reverse morality governments seem to use this fear of what is after all, now an abstract noun, to prevent their voters having good things in life.

I rather think we’ve been had.


  1. Schofield -

    Certainly the majority of voters around the world have been had by the Neoliberal propaganda of market fundamentalism (Invisible Hand) which purports the so-called truism that if you serve your own interests as a capitalist you serve those of others! No role for sociopaths in this propaganda deliberately inflating house prices or right-wing Neoliberal governments deliberately ignoring them doing it for reasons of corruption and/or ideology!

    1. Peter May -

      Many thanks for the links as ever…

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