One of my favorite U.S. historians is John Steele Gordon. He published a concise article this week on the history of a topic much in the news today - inflation. Here's an excerpt - see the complete article online.
Money is just a commodity, no different than petroleum or legal services. Thus it can rise and fall in price. What makes money unique among commodities is that it is the only commodity that is universally accepted in exchange for every other commodity. That's why we have a special term for a fall in the price of money. We call it inflation.
Inflation is almost as old as money itself (coins date to about 650 BC). When Roman emperors began debasing their coinage, prices rose commensurately. The vast influx of gold and silver into Europe from the New World after the Spanish conquest caused about a 400 percent inflation over the course of the sixteenth century.
Financing wars by printing
fiat money — money that is money only because the government says it is money — has been responsible for much of the history of inflation. The Continental Congress issued no less than $225 million in
continentals between 1775 and 1779. Prices rose eightfold in those years. The phrase
not worth a continental became a part of the American lexicon for a century.
In the Civil War, the federal government raised about 12 percent of its revenue needs with
greenbacks, fiat money so-called because the reverse side was printed in green ink. Prices in the North rose about 75 percent as a result. The Confederacy had to meet about 50 percent of its revenue needs with fiat money. Prices rose 700 percent in just the first two years of the war and the Southern economy began to spin out of control, not the least of the reasons the South's bid for independence failed.
In modern times, World War II caused considerable inflation, but most of it was suppressed until wage and price controls were lifted at the beginning of 1946. In the late 1960s, President Lyndon Johnson tried to pursue the Vietnam War while simultaneously extending the New Deal with programs such as Medicare, Medicaid and Head Start. The result was greatly increased government expenditures. Between 1965 and 1968, non-defense spending rose by a third, while defense spending rose 64 percent.
With most money by that time in bank balances, not coins and bills, the actual printing of money was no longer needed. Instead the Federal Reserve kept interest rates low by buying up federal bonds, printing the money in all but the actual printing. The effect was the same: inflation took off.
To read the complete article, see:
The inevitable return of inflation
Wayne Homren, Editor
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