What Did We Do About Inflation Before Economists?

Authored by John Tamny via,

In their new book America In Perspective, David Sokol and Adam Brandon report that in 1700, what eventually became the United States had a population of 250,000. By 1770 it was 2.1 million. One hundred years later there were 40 million Americans. By 1914, the number had ballooned to 99 million.

What explains the surge of humans from all over the world?

It’s a waste of words to answer the question, but for those still a little bit sleepy, the answer to the question is economic growth. Word travels fast on the matter of prosperity. Abnormally fast growth logically proved a magnet for the world’s strivers in search of something better.

Was all the growth a driver of inflation?

It’s a waste of words to answer this question too, but the words will be wasted owing to a growing desire among members of the Left and Right to re-define inflation as a consequence of too much “demand” born of, yes, growth. What a laugh.

Indeed, the surest sign the U.S. didn’t have an inflation problem was the growth itself. Figure that the latter is an obvious consequence of investment (not the “demand” bruited by conservatives and liberals who’ve replaced common sense with textbooks), and investment is all about the production of more and more for less and less. Yes, investment is generally about productivity enhancements meant to produce abundantly and cheaply what used to be expensive and scarce. If you’re wondering if an economy is growing, just look at prices. If once pricey items are becoming more and more accessible, you know there’s growth.

Notable about the above is that the falling prices born of surging growth don’t signal deflation. Stop and think about it. If you suddenly have more dollars thanks to reduced unit prices, you will have more money to pursue new things; that, or your savings will be directed to those with near-term consumptive needs via financial intermediaries. Falling prices beget rising prices elsewhere and vice versa, while no act of saving ever shrinks “demand.” It just shifts it.

Why was growth so substantial in the colonies that became the U.S., and in the United States itself? Certainly the arrival of ambitious people seeking the U.S.’s freedom and free markets loomed large. Call it the dominant factor. Of course, a low-entropy input to this growth was that the dollar had a stable definition from the late 18th century through the first third of the 20th as 1/20.67 of a gold ounce. Love or hate the gold standard, it cannot be denied that it personified dollar-price stability. And with the dollar stable, inflation wasn’t a problem. Substantial growth, but no inflation. Please keep it in mind given the modern discussion of “inflation.”

What prevailed throughout much of the U.S.’s early existence requires routine re-statement due to the rising consensus on the Left and Right that “demand” is the source of our alleged “inflation” troubles today. In his most recent opinion piece for the Wall Street Journal, Harvard professor and former Obama administration CEA Chairman Jason Furman asserted that the “economic logic for demand reduction to curb inflation is clear.”

It’s hard to know where to begin here.

In Furman’s case he’s arguing that reduced economic growth via “higher taxes, lower government spending, or a combination of the two” will tamp down rising price pressures. Except that these won’t. Figure that measures taken to reduce “demand” will by definition reduce supply. Waste of words? Most certainly, but once again necessary. It’s necessary because Furman believes slower economic growth is the inflation answer. Actually, the inflation answer is a stable dollar. Nothing else. See the U.S. of old.

What’s disappointing about all this is that Furman’s theoretical ideological opposites on the Right see inflation in the way he does. For decades they’ve promoted the fiction that Fed Chairman Paul Volcker stopped inflation by putting Americans out of work. If we forget for now that conservatives vastly overstate the Fed’s power, how very ridiculous to presume that stable money requires desperation. It’s all ridiculous until it’s understood that the dominant ideologies of today (and yesterday) are still captivated by a cart-before-the-horse, demand-side view of the world.

We know this because while Furman claims the present inflation solution is higher taxes (that he truly believes government spending a stimulant is a write-up for another day; that, or just look through my archives at myriad opinion pieces correcting this bit of fabulist thinking) meant to reduce demand, so do conservatives think shrinking demand is the answer. In their case, their critique of government spending is that it fosters “excess demand” on the way to higher prices. Except that it doesn’t. While the arguments against government spending are too numerous to list, the latter doesn’t cause higher prices born of “excess demand.” We know this because government can only redistribute wealth and “demand” insofar as it reaches into the pockets of the productive. All demand is a consequence of supply, period. If government gives you $20, someone else has $20 less. Basic economics.

The challenge of the moment is that basic economics is being pushed aside. Well educated thinkers on the Right and Left have chosen to redefine inflation, all the while ascribing new causes of it. They remind us that economic knowledge isn’t born of education, and never was. It’s just common sense. We’d be much better off if Lefties from Harvard and Right-of-Center “free market” thinkers from University of Chicago just skipped what wastes time and money, only to read Adam Smith.

Whatever the solution, we know that inflation isn’t a consequence of “demand” and economic growth. If it were, the U.S. of 1787-1914 would have been defined by rampant inflation in an economic sense. Except that it wasn’t. Inflation is a departure from currency-price stability. Nothing else. That this is lost on the experts of today means lots of words are being wasted in concert with very little learning.

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John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors ( His most recent book is When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. 

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