Academic journal article Economic Commentary (Cleveland)

On the Origin and Evolution of the Word Inflation

Academic journal article Economic Commentary (Cleveland)

On the Origin and Evolution of the Word Inflation

Article excerpt

Today, we commonly hear about different kinds of inflation. Indeed, the word inflation is often used synonymously with "price increase." But there is also a different, more specific, definition of inflation-a rise in the general price level caused by an imbalance between the quantity of money and trade needs. This "inflation" has but one origin-the central bank. It is the latter definition that drives many of those advocating an anti-inflation policy for the Federal Reserve, and that more closely conforms with the word's original meaning.

Inflation is the process of making addition to currencies not based on a commensurate increase in the production of goods.

-Federal Reserve Bulletin (1919)

Most prominent among these inflationary forces were a drop in the exchange rate of the dollar, a considerable increase in labor costs, and severe weather.

-Federal Reserve Bulletin ( 1978)

For many years, the word inflation was not a statement about prices but a condition of paper money-a specific description of a monetary policy. Today, inflation is synonymous with a rise in prices, and its connection to money is often overlooked.

Consider the opening quotations, taken from Federal Reserve Bulletins spanning a period of almost 60 years. The first defines inflation as a condition of the currency, while the latter makes no reference to money. Indeed, it would seem that in 1978, inflation was about many things other than excessive money growth.

This Economic Commentary considers the origin and uses of the word inflation and argues that its definition was a casualty in the theoretical battle over the connection between money growth and the general price level. What was once a word that described a monetary cause now describes a price outcome. This shift in meaning has complicated the position of anti-inflation advocates. As a condition of the money stock, an inflating currency has but one origin-the central bank-and one solution-a less expansive money growth rate. But as a condition of the price level, which may have originated from a variety of things (including a depreciating dollar, rising labor costs, bad weather, or a number of factors other than "too much money"), the solution to-and the prudence ofeliminating inflation is much less clear.

Value, Money, and Currency

I smiled at myself at the sight of all this money. "Oh, drag, "said , aloud, "What art thou good for? Thou art not worth to me, no not the taking off the ground. One of these knives is worth all this heap. "

-Daniel Defoe (1719)

Robinson Crusoe

The classical economists, by which I refer to the generation writing around the time that Adam Smith's The Wealth of Nations was published in 1776, were very exact in defining economic terms, because they were constructing a language on which an emerging science was being built. Among their first contributions was to make explicit the distinction between "real" and "nominal" prices. A good's real price, or value, was defined as the effort required to produce it, while its nominal, or money, price was said to be its cost in money alone (fixed in terms of gold or some other precious metal).

According to this view, the value of goods is anchored by the laws of nature -the effort of labor-but their nominal price fluctuates with the availability of the precious metal, and the laws of the sovereign, that define a nation's money.

The real price of everything... is the toil and trouble of acquiring it. The same real price is always of the same value; but on account of the variations in the value of gold and silver, the same nominal price is sometimes of very different values.

-Adam Smith (I776)

Although the classical economists supposed that fluctuations in the money price of goods can have temporarily disruptive influences on the economy (such as producing capricious redistributions of wealth between parties bound by contracts with fixed money prices), in the end, these changes merely serve to alter the scale by which value is measured. …

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