A cultural history of inflation in America

The title of this post is more in the way of a question regarding whether such a thing exists. The reason I’m asking is that, in the course of researching higher education costs in America back to the middle of the 19th century, I discovered something that flew in the face of what I had always assumed about how inflation works in a money economy. What I assumed was that a moderate amount of price inflation is normal — that is, continual rather than episodic — in such economies, and that deflation is rare. Furthermore, I thought (to the extent that unexamined assumptions can be called thinking) any significant or prolonged deflation is an economic disaster, and is something to be feared and avoided even more than hyper-inflation.

Again, these beliefs were the product of nothing more than the fact that this is how things have “always” been as long as I can remember, and that my extremely limited historical knowledge of the subject stretched back no further than the Great Depression, when deflation did help wreak havoc on both the American and world economy.

As many readers no doubt already know, this historical view of inflation and deflation in America — which I suspect, based on my study featuring an N = 1, is quite widespread — is totally wrong.

In fact until about 75 years ago, deflation had been as a historical matter as common in America as inflation. This fact produced what were to me some shocking revelations, including:

(1) Overall prices in the American economy were about the same at the beginning of FDR’s presidency as they had been at the end of George Washington’s second term.

(2) Prices were nearly 25% lower in 1900 than they were in 1800 — that is, on net the 19th century was deflationary.

(3) Prior to the middle of the 20th century, significant inflation, rather than being seen as a normal thing, was very closely associated with, and clearly caused by, war. Indeed, prices would have been very strongly deflationary over a 200-year period if not for bouts of severe inflation during the Revolutionary War, the Civil War, and World War I.

(4) If we consider American economic history from colonial times to the present, the last 75 years have been an almost freakish exception to the normal course of events, in which prices are as apt to fall as they are to rise.

I suspect the last point has had some important cultural and political effects — hence the title of this post. What are the consequences of a generalized sense that prices always rise? Let me suggest just one of many possibilities: people may become relatively desensitized to real as opposed to nominal price increases, because over the long run nominal price increases become so extreme.*

In other words, a general sense that “things cost so much more today than they did back in X” may tend to blur distinctions between different sorts of things, some of which haven’t actually become more expensive in real terms (or have become much cheaper), and some of which very much have.

This of course is just one of many possibilities. In any case, I’m curious about the extent to which the historical anomaly of continual inflation since the end of the Great Depression has been written about, especially in regard to its possible cultural effects.

*I now understand something that puzzled me when I first read Keynes’ “Economic Possibilities For Our Grandchildren,” which was his statement of money values in nominal terms when he compared the the 18th century with the early 20th century. Habituated as we are to a world in which prices always rise, I naturally assumed that nominal prices in the former and latter periods had nothing to do with comparative real prices, just as looking at, for example, the nominal price of a car in 1950 tells you nothing about the real price of car then relative to now. But it turns out that, until the last few decades, economists could treat even 200-year stretches of time as featuring relatively stable prices in the long run!