#83 Price Deflation (The End of Laissez-Faire Part 6)

Read Part 5 of this Series

Author’s note:

This series of blogposts will be my paraphrased notes on a lecture given by Murray Rothbard called “The American Economy and the End of Laissez Faire“. This means the post will contain some word for word transcriptions of Rothbard’s words and some editorializing and rephrasing of my own. I will not distinguish between the two.

Historical prices are often difficult to comprehend through a modern lens. Now a days, we think in terms of prices that go up every year, our only question is by how much, however, in the days of hard money standards, and outside of wartime, prices generally fell year over year and it was magnificent for the consumer.

Prices used to fall by roughly 3% per year. As supply of goods and services increases, prices tend to fall. Wages tended to remain about the same. This is how a healthy economy functions.

In the modern day, despite the fact that goods and services are increasing, prices do not fall. Why? Because the money supply expands to finance the state. In the days of hard money standards, everyone knew in their heart and soul and gut that if they saved money, the value of their savings would go up. This is quite different from the modern man who has his savings wiped out year after year by inflation, whereas historically, savings would go up in value by deflation.

Contrary to the belief of many economically illiterate historians, falling prices does not necessitate a depression, because in this environment costs also fell. In other words, productivity went up (as capital goods stock and technology went up), costs went down (and so prices fell), and profits were maintained.

The average consumer fared very well with falling prices. This was the condition of the US economy on average from about 1800 to around 1940 (with the exception of during wartime).

During wartime, governments require large amounts of capital, quickly. How do they obtain this capital? Primarily, they print money, whether it be physical notes or bank credit, they expand the money supply and give themselves first access to the newly created currency to finance the war effort.

This causes demand curves to steepen, which causes prices to increase. When enough new money is created in this way, it can offset the increases in productivity which would, ordinarily, bring prices of goods and services down.

This is most notable during the war of 1812, the Civil War, World War I and World War II. With the exception of 1894-1914 (during which prices increased slowly, but we will cover this period in more detail later) and during the wartime noted above, prices fell year over year with increases as increases in productivity brought them down.

Contrast this wartime burst in fiscal deficits with the more modern American empire and you see that the wartime fiscal expansions of the 19th and early 20th century have been eclipsed by eternal fiscal expansion marked by the post Bretton woods era (1971-now).

As a result, prices around 1940 were roughly the same as they were in 1814 (all of these financial shenanigans netted out over a long term basis). Fluctuations in prices can be observed historically during wartimes, and then after those wars ended, as fiscal burdens gradually returned to their baseline, prices would once again begin falling.

Wholesale prices between 1840 and 1860 were relatively constant, 1860-1865 prices increased dramatically (as much as 99%) due to the tremendous inflationary pressures to pay for the civil war effort (on both sides of the Mason Dixon line). The most interesting aspect of the greenback monetary period during the civil war, was that payment in gold was not outlawed as it is today.

As such, the laymen could easily observe that prices in the Western United States, where trade was still predominantly done in gold coin rather than in paper greenbacks like in the eastern US, were inflated by paper money. A loaf of bread which might cost $1 in gold coin, would cost twice as much if paid for in paper greenbacks.

There was no way to place the blame for this pricing disparity on speculators or capitalists or greedy business owners, it was obvious to everyone that there was something fundamentally different about the value of the gold coins and the value of the irredeemable paper monies (greenbacks). This “problem” with paper money was simply that the supply of it kept increasing in order to finance the war effort.

From 1860-1870 wholesale price increases were 46%, as prices began to fall as soon as the Civil War ended. From 1870 to 1880 prices fell by 26%, this was in spite of the fact that money supply kept increasing throughout this period, increases in productivity actually  offset the increases in the money supply and still resulted in falling prices.

From 1880-1890 there was a drop in prices of 18%. Many historians mistakenly look at this time period of wholesale price deflation as an economic depression, however, this was absolutely not the case. Falling prices resulted in falling costs which was good for consumers and good for producers. Historians view prices through the modern lens, with which one has become very accustomed to prices consistently increasing year over year (thanks to the eternal deficit spending of the modern nation state).

Read Part 7 of this series

A fierce Canadian goose aggressively defending his tower.