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As the Federal Reserve weighs the benefits of monetary easing against the dangers of monetary inflation, it is easy to lose sight of the bigger resolution that has occurred over the last quarter century. For a substantial part of America’s history and a significant part of its population, inflation was seen as a positive to be pursued. Yet within a generation, that perception has completely reversed. This fundamental change has been global and happened in spite of entrenched support from governments, economists, and policy-makers. It should hearten conservatives that, despite the vagaries of political battles, they are winning the larger economic war.
The history of strong support for an inflationary monetary policy is long and deep in America. Nineteenth-century America was predominantly rural and largely populated by small farmers. In general, farmers are almost invariably debtors, often needing credit to purchase land and supplies between harvests. Even large landowners were likely to be land-rich and cash-poor. As such, an inflationary monetary policy offered them relief from their debts — affording them easier repayment with depreciated dollars.
Unsurprisingly, inflationary monetary policies were sought through various political movements and means. The Greenback Party pursued inflation through a continuation of paper currency following the Civil War, while the Populists sought it by supplementing gold-backed dollars with cheaper silver. Political efforts crested in 1896 when the Democrat party was captivated, and then captured, by William Jennings Bryan. Stampeded by his “Cross of Gold” speech at its Chicago convention, Bryan won the first of three Democratic nominations.
Though the Democratic Party split (incumbent Democratic President Grover Cleveland opposed him) and despite running as virtually a single-issue candidate, Bryan still managed to gain 47 percent of the popular vote, carried 22 states (to McKinley’s 23), and 176 electoral votes (to McKinley’s 271).
Silver and inflation retained their sirens’ song in the 20th century. In 1933, FDR still felt obliged to “do something” for silver. The Great Depression elevated inflation to acceptable monetary policy. It became ensconced into economic theory, later most notably in the so-called Phillips curve, whereby inflation became linked to lower unemployment.
Nor was its support limited to economists. Governments and policy-makers also benefited from inflation. Excess money creation gave the government additional resources, without additional taxing or borrowing. It generated additional revenue as “bracket creep” drove individuals into higher tax brackets. And it effectively depreciated government debt by allowing repayment with depreciated dollars. For policy-makers, inflation was a powerful lever they could seemingly pull at will to adjust the economy.
No longer just a response to the Depression, inflation had become a positive policy in its own right. And especially so for the worker. Higher inflation meant higher demand for workers and higher employment and wages.
WHILE THIS WAS THE PREDOMINANT economic view following WWII, it certainly was not universal. Economist Milton Friedman was its foremost critic, explaining inflation as simply money creation in excess of output, and his work helped sap inflation’s theoretical foundation. More significantly, economic performance in the 1960s and 1970s frayed the positive connection between inflation and lower unemployment. Maintaining steady levels of unemployment then began requiring increasing levels of inflation — termed stagflation.
Finally, increasing inflation levels began yielding increasing levels of unemployment. Friedman’s 1977 Nobel lecture occurred at that economic juncture: “The present situation cannot last. It will either degenerate into hyperinflation and radical change, or institutions will adjust to a situation of chronic inflation, or governments will adopt policies that will produce a low rate of inflation and less government intervention into the fixing of prices.”
The decision at this crossroads was to turn away from inflation. Despite an array of history, economists, governments, and policy-makers, inflation was swept away in just a quarter of a century. And it happened globally, not just in the U.S. Instead of desirable policy to be pursued, inflation now universally carries the mark of economic failure.
Such sudden and widespread a collapse in thought and practice rarely happens. Yet theory has now discredited, experience repudiated, and the electorate renounced it.
SUCH ANIMADVERSION OFFERS us a couple of valuable reminders. One is the population’s improved economic condition. While many continue to insist that modern society pauperizes the bulk of her people, the changed perception of inflation argues otherwise. Today’s population is no longer dominated by debtors for whom inflation offers relief. They are now largely asset holders for whom inflation is now a threat.
The demise of inflation’s acceptability also reminds us of the limits of conventional wisdom. This was no minor policy that fell from grace. Governments and economies espoused it and rested on it. Yet ultimately expertise extends no further than experience. Within a generation that experience re-educated over a century of thought and rewrote the verdict on inflation around the world. By so doing, it continues to caution us on accepting the consensus of certitude.
Finally, inflation’s fall from grace should remind conservatives they are winning the economic war. The last quarter of a century has seen not only inflation’s demise but a host of the Left’s economic tools. State-run economies are historical relics, as are price controls and rationing. Though they now seem antiquated, all existed relatively recently. In their absence, markets are freer, more widespread, and the world’s population is benefiting accordingly. To apply Friedman’s verdict on inflation more broadly: “brute experience [has] proved far more potent than the strongest of political or ideological preferences.” Inevitably, such will always be the case.
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