What Scaremongering About Inflation Gets Wrong
Inflation. We all know it when we see it. Prices rise, gas stations have lines. Graphs point upward. Eyebrows lift. Eyeballs roll. From Mary Tyler Moore gently tossing a package of meat into her shopping cart in the opening credits of her 1970s sitcom to a recent cartoon asking if there’s a vaccine for “sticker shock,” inflation would seem to be the most visible of macroeconomic phenomena.
Economist Milton Friedman repeatedly counseled: “Inflation is always and everywhere a monetary phenomenon.” Friedman, sometimes called the most influential economist of the 20th century, argued that prices automatically rose whenever too much money chased too few goods. His best-selling books, television series and role in Ronald Reagan’s White House made his “monetarism” economic common sense for much of the past four decades. Today, when economists like Lawrence H. Summers warn that the American economy is in danger of “overheating,” they repeat those same assumptions.
Yet, historians know money and inflation don’t quite work that way. The history of inflation isn’t skyrocketing prices inevitably caused by the same mistakes. It is, rather, a history of changing words, changing numbers — and most important, the people who change them. Time and time again, it’s a story of pundits making ahistoric claims to promote their own policy agendas and of changing priorities in what gets measured and how.
The word “inflation” only began to refer to money and economics in the mid-1800s. For centuries before that, it solely meant the action or condition of being filled with air. (Balloons were inflated. Charles Darwin, on his youthful expedition to South America, described the “inflation” of a puffer fish.)
Moreover, when “inflation” entered economic usage in the 1860s-1870s, it meant increasing the money supply — what today might be called “economic stimulus.” By issuing greenbacks, for example, the Lincoln administration had, according to its critics, “inflated” American currency. It had also, of course, helped to finance and win the Civil War. Yes, prices rose, but the term inflation wasn’t intended to convey that, and they rose because of military necessity driving up demand.
In the early 20th century, however, economist Irving Fisher’s “equation of exchange” (MV=PT) established an apparent necessary relation between money supply and price levels. The charismatic Fisher’s fame, burnished by his public-health campaigning and ties to the eugenics movement, fueled buy-in for the idea. He was the first celebrity economist, a man whose pronouncements were quoted far and wide. If he said inflating the currency would automatically lead to rising prices, few would challenge him. Yet, Fisher was far from infallible: He failed to predict the 1929 stock market crash.