Historically Speaking: Inflation Once Had No Name, Let Alone Remedy

Empires from Rome to China struggled to restore the value of currencies that spiraled out of control

The Wall Street Journal

May 27, 2022

Even if experts don’t always agree on the specifics, there is broad agreement on what inflation is and on its dangers. But this consensus is relatively new: The term “inflation” only came into general usage during the mid-19th century.

Long before that, Roman emperors struggled to address the nameless affliction by debasing their coinage, which only worsened the problem. By 268 AD, the silver content of the denarius had dropped to 0.5%, while the price of wheat had risen almost 200-fold. In 301, Emperor Diocletian tried to restore the value of Roman currency by imposing rigid controls on the economy. But the reforms addressed inflation’s symptoms rather than its causes. Even Diocletian’s government preferred to collect taxes in kind rather than in specie.

A lack of knowledge about the laws of supply and demand also doomed early Chinese experiments in paper money during the Southern Song, Mongol and Ming Dynasties. Too many notes wound up in circulation, leading to rampant inflation. Thinking that paper was the culprit, the Chongzhen Emperor hoped to restore stability by switching to silver coins. But these introduced other vulnerabilities. In the 1630s, the decline of Spanish silver from the New World (alongside a spate of crop failures) resulted in a money shortage—and a new round of inflation. The Ming Dynasty collapsed not long after, in 1644.

Spain was hardly in better shape. The country endured unrelenting inflation during the so-called Price Revolution in Europe in the 16th and 17th centuries, as populations increased, demand for goods spiraled and the purchasing power of silver collapsed. The French political theorist Jean Bodin recognized as early as 1568 that rising prices were connected to the amount of money circulating in the system. But his considered view was overlooked in the rush to find scapegoats, such as the Jews.

ILLUSTRATION: THOMAS FUCHS

The great breakthrough came in the 18th century as classical economists led by Adam Smith argued that the market was governed by laws and could be studied like any other science. Smith also came close to identifying inflation, observing that wealth is destroyed when governments attempt to “inflate the currency.” The term “inflation” became common in the mid-19th century, particularly in the U.S., in the context of boom and bust cycles caused by an unsecured money supply.

Ironically, the worst cases of inflation during the 20th century coincided with the rise of increasingly sophisticated models for predicting it. The hyperinflation of the German Papiermark during the Weimar Republic in 1921-23 may be the most famous, but it pales in comparison to the Hungarian Pengo in 1945-46. Inflamed by the government’s weak response, prices doubled every 15 hours at their peak. The one billion trillion Pengo note was worth about one pound sterling. By 1949 the currency had gone—and so had Hungary’s democracy.

In 1982, the U.S. Federal Reserve under Paul Volcker achieved a historic victory over what became known as the Great Inflation of the 1960s and ‘70s. It did so through an aggressive regimen of high interest rates to curb spending. Ordinary Americans suffered high unemployment as a result, but the country endured. As with any affliction, it isn’t enough for doctors to identify the cause: The patient must be prepared to take his medicine.

Historically Speaking: The High Cost of Financial Panics

Roman emperors and American presidents alike have struggled to deal with sudden economic crashes

The Wall Street Journal, January 17, 2019

ILLUSTRATION: THOMAS FUCHS

On January 12, 1819 Thomas Jefferson wrote to his friend Nathaniel Macon, “I have…entire confidence in the late and present Presidents…I slumber without fear.” He did concede, though, that market fluctuations can trip up even the best governments. Jefferson was prescient: A few days later, the country plunged into a full-blown financial panic. The trigger was a collapse in the overseas cotton market, but the crisis had been building for months. The factors that led to the crash included the actions of the Second Bank of the United States, which had helped to fuel a real estate boom in the West only to reverse course suddenly and call in its loans.

The recession that followed the panic of 1819 was prolonged and severe: Banks closed, lending all but ceased and businesses failed by the thousands. By the time it was over in 1823, almost a third of the population—including Jefferson himself—had suffered irreversible losses.

As we mark the 200th anniversary of the 1819 panic, it is worth pondering the role of governments in a financial crisis. During a panic in Rome in the year 33, the emperor Tiberius’s prompt action prevented a total collapse of the city’s finances. Rome was caught among falling property prices, a real estate bubble and a sudden credit crunch. Instead of waiting it out, Tiberius ordered interest rates to be lowered and released 100 million sestertii (large brass coins) into the banking system to avoid a mass default.

But not all government interventions have been as successful or timely. In 1124, King Henry I of England attempted to restore confidence in the country’s money by having the mint-makers publicly castrated and their right hands amputated for producing substandard coins. A temporary fix at best, his bloody act neither deterred people from debasing the coinage nor allayed fears over England’s creditworthiness.

On the other side of the globe, China began using paper money in 1023. Successive emperors of the Ming Dynasty (1368-1644) failed, however, to limit the number of notes in circulation or to back the money with gold or silver specie. By the mid-15th century the economy was in the grip of hyperinflationary cycles. The emperor Yingzong simply gave up on the problem: China returned to coinage just as Europe was discovering the uses of paper.

The rise of commercial paper along with paper currencies allowed European countries to develop more sophisticated banking systems. But they also led to panics, inflation and dangerous speculation—sometimes all at once, as in France in 1720, when John Law’s disastrous Mississippi Company share scheme ended in mass bankruptcies for its investors and the collapse of the French livre.

As it turns out, it is easier to predict the consequences of a crisis than it is to prevent one from happening. In 2015, the U.K.’s Centre for Economic Policy Research published a paper on the effects of 100 financial crises in 20 Western countries over the past 150 years, down to the recession of 2007-09. They found two consistent outcomes. The first is that politics becomes more extreme and polarized following a crisis; the second is that countries become more ungovernable as violence, protests and populist revolts overshadow the rule of law.

With the U.S. stock market having suffered its worst December since the Great Depression of the 1930s, it is worth remembering that the only thing more frightening than a financial crisis can be its aftermath.