The Fed Is All Wrong About Inflation

Second, Fischer is a subtle-enough historian to realize that the changing nature of governments and societies changes the possible response to a price wave. He notes, for example, that social relief programs that date back to the 18th century have been critical in reducing the degree of suffering among the poor during more recent price waves. I'd add that the expansion of political power from a narrow elite as in pre-revolutionary France to the voting population of today's America has changed the way that the society responds to the initial stages of a price wave.

Real wages still fall in today's U.S. because of rising prices, but thanks to credit cards and home-equity lines of credit, you don't have to be the Duc de Deux Ponts to find a way to keep up with inflation. (In 1786, the Duc said about the peasants, "It is in our interest to feed them, but it would be dangerous to fatten them.")

Third, we don't know where we are in this price wave. If it started in 1896 and lasted 80 years -- the minimum for the waves Fischer studied -- it would be over by now. If it lasts 180 years -- the maximum for previous waves -- it will end in 2076.

I think this price wave still has years to run, and when it ends and how it ends depends not on some mechanical theory of history but on the decisions we make now. As Fischer points out, the collapse of the French monarchy, the bloodbath of the French revolution, and the world war unleashed by Napoleon were by no means preordained.

Fischer writes: "By 1787, Europe's most powerful government (France) was on the edge of bankruptcy. ... Ministers tried desperately to balance their books. Economies were enacted. The king himself, Louis XVI, set an example by reducing his household expenses from 22 million livres to 17 million, largely by consolidating the royal stables. ... The financial ministers of Louis XVI pleaded desperately for more revenue, and were refused. The possessing classes refused to accept new taxes. Many demanded more privileges and exemptions. This combination of public need and private greed was fatal."

So how will this wave end? It's our choice.