By Jonny Lupsha, Wondrium Staff Writer
From the United States to Japan, the world is struggling with inflation. Spending habits and government policy are changing in response. Some economists say four major waves of inflation have hit since the 1300s.
Governments and their citizens worldwide are facing—and struggling to adapt to—inflation. In Europe, central banks are hiking interest rates at their highest pace since the 1990s. Elsewhere, governments aim to counter inflation through policy. The Japanese government recently passed a spending bill equivalent to $200b USD to keep inflation rates low. Meanwhile, in the United States, the Inflation Reduction Act became law on August 16, overcoming fierce opposition in both the Senate and the House.
Historically speaking, inflation has been an economic concern for at least seven centuries. In his video series The Economics of Uncertainty, Dr. Connel Fullenkamp, Professor of the Practice in the Department of Economics at Duke University, examines the theory of four major waves of historical inflation.
The First and Second Waves
“An increase in aggregate demand will make prices rise—but so will a fall in aggregate supply,” Dr. Fullenkamp said. “If we think carefully about different episodes of inflation throughout history, we can see both forces at work. For example, some economic historians state that since the Middle Ages, four major waves of inflation have swept across the Western world, including Europe and its colonies.
“According to this view, we’re currently in the middle of the fourth wave.”
The first three waves are described as taking place in the 14th, 16th, and 18th centuries, respectively. In each of these, population growth seemed to be a main driving force of inflation. As the world population grew, so did demands for food, housing, and fuel, leading to a generalized inflation.
“The second wave of inflation included the conquest of the New World and led to huge inflows of gold and silver into Europe from the Americas,” Dr. Fullenkamp said. “Since gold and silver coins were the main type of money used at the time, this inflow of precious metals did contribute to a second wave of inflation—but the key word here is contribute.
“That inflationary wave, according to economic historians, started well before the gold and silver started arriving—and again, it was concentrated in food, land, and fuel prices.”
Unlike the first three major waves of inflation, the current wave of inflation seems to be primarily tied to increases in the money supply as opposed to population. Beginning in the late 19th century, this wave is related to the general abandonment of gold and silver as currency in favor of fiat currencies, which only have value due to a government promising to protect the value of the money. This changeover was already underway in the United States during the Civil War.
“The big event that effectively forced the world to change to fiat currencies occurred in 1971, when the U.S. went off the gold standard,” Dr. Fullenkamp said. “This forced most of the world off the gold standard, as well, since, at the time, most other countries had tied their currency to the U.S. dollar.”
Therefore, when the U.S. severed its ties to gold, it put far more control over the supply of money in the economy into the hands of the government.
However, most governments influence the money supply indirectly through the interaction of the central bank with the commercial bank system. Unfortunately, Dr. Fullenkamp said, that increases the unpredictability of inflation, since it can take up to two years for a change in monetary policy to achieve its full effect on the economy.
“Monetary policy affects inflation through increasing—or decreasing—the amount of demand in the economy, especially by increasing or decreasing the amount of lending that goes on,” he said. “The government can also influence inflation through fiscal policy—that is, its own spending and taxing—because this also has a big effect on the level of aggregate demand.”
The Economics of Uncertainty is now available to stream on Wondrium.