Everything Everywhere Daily: History, Science, Geography & More - Inflation

Episode Date: November 17, 2021

If you’ve been around long enough, you might have noticed that things are more expensive than they used to be. If you’ve really been around long enough you know that things are a lot more expensive than they used to be. This is of course known as inflation. It is an economic condition that has been around throughout history, almost everywhere on Earth. In a few cases, it has gotten so bad that it strained the limits of imagination. Learn more about your ad choices. Visit megaphone.fm/adchoices

If you've been around long enough, you might have noticed that things are more expensive than they used to be. If you've really been around long enough, you know that things are a lot more expensive than they used to be. This, of course, is known as inflation. It's an economic condition that's been around throughout history and almost everywhere on Earth. In a few cases, it's gotten so bad that it strained the limits of imagination. Learn more about inflation and how it's manifested throughout history on this episode of Everything Everywhere Daily. Do you ever climb into bed, ready to sleep, only to have your mind start racing the moment your head hits the pillow? Thoughts bouncing around, replaying the day or jumping ahead to

tomorrow? That is exactly why Catherine Nicolai created Nothing Much Happens. Each episode is a gentle, cozy bedtime story where, well, nothing much happens. No drama, no tension. Nothing you need to follow closely. Just soft narration, calming repetition, and soothing sensory details designed to help your mind slow down and your body relax. It's not about entertainment, it's about rest. and millions of listeners around the world use it every night to quiet their thoughts and finally fall asleep. If you've ever struggled to shut your brain off at night, this might be exactly what you've been missing. You can listen to Nothing Much Happens wherever you get your podcasts. Episodes are every Monday and Thursday. The definition of inflation is a general increase in the

price of goods and services in an economy. Or, to put it another way, each unit of currency has less value and is able to buy less than it did before. This is distinct from an increase in the price of a single good or a category of goods. To demonstrate the idea, I'll give a couple hypothetical examples. Let's suppose that there is a rare winter freeze in the state of Florida that does severe damage to the orange crop. The number of oranges, which will be harvested, goes down, as does the supply of other products such as orange juice. Because the supply of orange juice drop so sharply, by the laws of supply and demand, the price will go up because there isn't as much orange juice to go around. Eventually, more oranges will be produced, the supply of orange juice

will increase, and the price will drop back down. This is not an example of inflation. This is just a supply and demand issue with a single commodity. People who would regularly drink orange juice either would have to pay more or shift to something else like apple juice or grape juice until prices adjust. You've probably seen prices for oil go up and down over the years. This can be due to a host of reasons, including decisions to increase or decrease oil production to manipulate oil prices. Inflation is something else entirely. Inflation is when the price of everything goes up. The cost of a movie ticket 100 years ago in 1921 was only 15 cents. Today, the average price is approximately $10, and in many cities it can be much more than that.

A new house back then was $6,296, and rent averaged $15 per month. And you could mail a letter for only two cents. The price of everything, including all goods, services, and wages will increase during inflation. So what causes this? The general consensus among economists is that inflation is a monetary phenomenon that comes from an increase in the supply of money. I'll use a hypothetical, if absurd example to illustrate the point. Let's suppose everyone in the United States was given a million dollars. Everyone would be a millionaire, right? Technically, yes, they would in the fact that everyone would have a million dollars. However, what a millionaire means would suddenly become radically different. It wouldn't mean everyone could suddenly have Lamborghinis and mansions,

because there aren't that many Lamborghinis and mansions to go around. The value of a dollar would simply be much less, as there would be so many more of them floating around the economy. It would result in the price of everything increasing many-fold, at least overnight. Some things which had contractual prices like debts and mortgages could be paid off trivially, as they were priced in before everyone was a wash in cash. The price of a single banana could be $20. You couldn't get anyone to work for $100 an hour if everyone was sitting on a million. This is an extreme example, but I think it illustrates the point of what happens when the money supply dramatically increases. Inflation has actually been around for several thousand years, although the way it happened

was very different than how it works today. Back in the day, money was based on precious metals like gold, silver, and copper. Governments reserve the right to issue coins, which they called seniorage. There would often be a difference between the face value of a coin and what went into making it, and that difference was a fee that the government would collect. In ancient Rome, the most common unit of money was the denarius. The denarius originally weighed approximately 4.5 grams with a purity of 98% silver, and it was that way for about 200 years. It was about the size and weight of a quarter or a 25 cent piece. The denarius became a solid, reliable unit of coinage because of the power of Rome and the stability of the coins. However, emperors and

kings are always in need of money. The primary way of raising money is usually just to raise taxes, but there's a limit to how much you can do that. The other way to get money is to debase the currency. Under the reign of the Emperor Augustus, the denarius went from 4.5 grams to 3.9 grams. Under Emperor Nero, the amount of silver in the coin was reduced to about 93%. Because all your payments and debts were denominated in denari, if you reduce the amount of silver in each coin, you can now make more money with the same amount of silver. The flip side of this is that the value of the denarius decreased, the quantity of the denari in circulation increased, and prices rose. Over the next 200 years, Roman emperors did this over and over, until the denarius had almost no

silver in it. By the year 275, the denarius was only 3.5 grams in weight, with only 5% silver content. This same basic story has played out over and over in history. China was the originator of paper money. During the Mongol rule of China, known as the Yuan Dynasty, they became the first government in history to simply create more paper money to fund wars and other expenses. When the Yuan dynasty finally fell and was replaced by the Ming Dynasty, for a time, they refused to issue paper currency and went back to copper coins

because paper became so untrustworthy under the Mongols. You might be wondering if it was possible to have inflation without debasing the coinage, such as the Romans did. And the answer is, yes, if you just mine a whole lot more precious metals. This basically happened in Europe from the 16th and 17th centuries, as tons of silver and gold were brought from the Americas to Europe. Prices increased about sixfold over a period of 150 years, simply due to the amount of precious metal being produced and sent to Europe. Ancient money always had some sort of limitation. Even if a coin had zero gold or silver, you still had to physically mint the coin. Chinese paper money was still limited.

by paper production and printing, which wasn't mechanized. Spain still had to mine silver and ship it back to Europe. When the 20th century rolled around, however, these limits were largely removed, and some countries were able to enter periods known as hyperinflation. Hyperinflation, as the name would imply, is inflation on steroids. Perhaps the best known example of hyperinflation was the Weimar Republic in the early 1920s. In 1914, Germany took the mark off the gold standard to pay for World War I. They almost exclusively used debt to pay for the war instead of taxes because their plan was to win the war and use reparations to then pay off the debt.

Needless to say, that didn't happen. The Treaty of Versailles required Germany to pay their reparations in gold, so Germany was forced to use the paper mark for internal purposes. The mark steadily declined in value from 1914. In 1914, at the start of World War I, $1 was worth $4.2 marks. In 1919, when the Treaty of Versailles signed, a dollar was worth 32.8 marks. In 1921, it was worth 83 marks, and in 1922 it was worth 430 marks. That is a 100-fold increase in just eight years. However bad this might seem, at this point, the Weimar Republic just said, hold my beer.

In 1923, it took 50,000 marks to buy a dollar, and in November of 1924, it reached a peak of $4,210,5,500 million marks to the dollar. Turns out, printing a bill with a few more zeros on it costs the same as printing one with less. This is where the famous metaphor of someone paying for a loaf of bread with a wheelbarrel full of money came from. However, this wasn't the only, or even the worst case of hyperinflation in the 20th century. Hungary after World War II suffered the worst hyperinflation in history. In 1944, the highest denomination of Hungarian currency was the one-firmary. Pango note. By the middle of 1946, their largest note was for 100 quintillion Pengo. At one point,

prices were doubling every 15 hours. The best known recent case of hyperinflation was in Zimbabwe, which had a peak annual inflation rate of 89.7 sextillion percent in November of 2008. And this was the same month that they released their famous $100 trillion bill. You can actually buy one of these on eBay, and they're worth more today as a collector's item than they were when they were printed as currency. I purchased several billion Zimbabwe dollars when I was there. All of the worst cases of hyperinflation in history have occurred within the last 100 years, usually after major wars or the collapse of the Soviet Union. When a country goes through hyperinflation, it really changes everything. Fortunes great and small are all wiped out if they're

held in that currency. Prices change so frequently that families often have people dedicated to just buying things. You want to get rid of your money as fast as possible because the next day it might be worth half as much. Many places of employment have to pay people every day or sometimes more than once a day. Recently in Venezuela, people would go to a family member's place of work to get their cash so they could immediately go and spend it before the prices went up. So yeah, inflation can be really bad if it gets out of hand. But how do you measure the price of everything? This is actually a really difficult problem. In the United States, they calculate what is known as the Consumer Price Index, or CPI. The CPI is supposed to measure the changes in price of a basket of consumer goods.

That sounds easy, but it's actually really challenging. Let's assume you price the cost of an internet connection and a computer, something that most people in a developed country will probably have. When comparing prices from 15 years ago, you're comparing very different things. An average internet connection today is much faster. A computer is going to be. A computer is going to to be better and cheaper than it was 15 years ago. Simply looking at the cost of a computer doesn't reflect the qualitative changes which have occurred. And that doesn't even address the problem of how you compare those prices to 1970 when none of those things even existed. There are some products which have stayed relatively the same, like wheat, except that really

isn't true. Modern strains of wheat plus mechanized farming have made the cost of wheat go down considerably due to increased productivity. Other things like the cost of college in the United States have gone up enormously, even though there has been very little in the way of technical changes or improvements in productivity. Many people think that the way the CPI is calculated has changed over time, and it underestimates the actual rate of inflation. Even if it's just a few percent a year, that can have enormous implications over time. There is another index called the Producer Price Index, or PPI, which measures the cost of inputs for domestic companies. Another way to measure inflation is just to look at the supply of money. The Federal Reserve and the United States,

States has an index called M1, which counts all of the physical currency plus money and checking accounts in the United States. The Federal Reserve is the primary agency responsible for monetary policy in the U.S. The main way they increase or decrease the money supply is through what is called open market operations. The Fed owns a great deal of the federal government's debt. If they want to increase the money supply, they can buy debt on the open market, bringing the debt to the fed and putting money out in circulation. To decrease the money supply, they do the opposite. They sell bonds, taking money out of circulation. Another tool they have is adjusting the reserve amount that banks have to hold. By increasing the reserve requirement, banks have to sit on more money, thus

taking it out of circulation. If you're wondering if you can have negative inflation, the answer is yes, and it's called deflation, and that can also be bad for a whole host of other reasons I'll address in a future episode. Most economists think that the best approach is to have a small predictable rate of annual inflation around 1 to 3%. However, given the magic of compound interest, even a 1% rate of inflation will cause prices to almost triple over the course of a century. Inflation doesn't have to reach Weimar Republic levels to cause problems. The United States had a peak inflation rate of almost 14% in 1980, and that made it one of the biggest economic issues of that time. For most developed countries over the last 40 years, inflation really hasn't

been a problem. Central banks, for the most part, have learned their lessons of the past and have avoided higher rates of inflation. Nonetheless, no matter how long it has been kept in check, if history teaches us anything, inflation can always rear its head. The associate producers of Everything Everywhere Daily are Peter Bennett and Thor Thompson. If you'd like to support the show, please join the list of patrons over at patreon.com. And also remember, if you leave a review or send me a question, you too can have it read on the show.