Riding the Wave


The Great Wave: Price Revolutions and the Rhythm of History, by David Hackett Fischer, New York: Oxford University Press, 536 pages, $27.00

If Alan Greenspan has not got a copy of this book by his bedside, then Oxford University Press ought to send it to him as a belated wedding present. Greenspan has been condemned by such advocates of organized labor as Robert Reich for his monomaniacal devotion to controlling inflation at the expense of all other social goals. Others have derided his job, with its tight-lipped incremental squeezing and relaxing of the federal funds rates–now up a quarter of a point, now down a quarter of a point–as the most boring in the world (suggesting such jokes as, "Can Alan Greenspan be cloned? Depends on if you need living tissue."). Yet here comes David Hackett Fischer, a history professor at Brandeis University, to claim through a study of eight centuries of world price history that not only is inflation undesirable, it is the mother of all evils, including falling real wages, inequality, fiscal crises, crime, marital disharmony, revolution, and war. Greenspan is thus on the front lines in the struggle for civilization.

The only discomforting thing for our Federal Reserve chairman in Fischer's analysis is the conclusion that inflationary pressures themselves are merely the visible sign of a deeper social cycle. Hence, if Greenspan does succeed in reducing inflation to zero, it will not be the result of his personal magnetism, but simply a sign that the current inflationary cycle has run its course, and inevitably a happy age of price stability is to follow. Greenspan is thus a mere cog, if a well-oiled and comfortably positioned cog, in a larger social machine, whose eternal cycles of inflation and stability can be traced back at least as early as the 13th century.

Fischer argues that the world has seen four great waves of inflation and stability since 1200. Each of these waves began with a long inflation–the Medieval Price Revolution (1200-1320), the 16th Century Price Revolution (1520-1620), the 18th Century Price Revolution (1720-1820), and the 20th Century Price Revolution (1896-1997)–followed by long periods of price stability. In each price revolution, population grew and real wages fell, while returns on capital and land ownership rose and such measures of social discord as crime and illegitimacy increased. Governments saw increasing fiscal crises, and revolution and war became more prevalent. In the succeeding periods of stability, real wages rose, returns on land and capital fell, and social, fiscal, and political harmony were restored.

The fundamental cause of these cycles, Fischer argues, is people's expectations. In the good times of price stability, confidence rises. People marry early and reproduce often. This increases the labor supply, reducing real wages and driving up the returns on the scarce factors, capital and land. Similarly, in the period of optimism people expand the scope of their economic activity. The result is "that aggregate demand grows more rapidly than supply. As it does so, the general price level begins to rise." As inflation gets sufficient momentum to become visible to all, and as real wages fall, individuals and institutions respond in ways that generally induce more inflation. "The stock of money is deliberately enlarged to meet growing demand. Capitalists charge higher rates. Landlords raise the rent. Real wages fall further behind."

As inequality increases, this creates "a problem of poverty and homelessness," putting a strain on social relationships and intensifying class conflicts. As social cohesion disappears, individuals try to improve their own welfare by making more claims on the state while reducing the taxes they pay. Fiscal crises result. Despair and pessimism spread. Markets become unstable; production and productivity stagnate so that stagflation ensues. In short order, drugs, drink, and sexual infidelity abound.

Surveying the social wreckage that the inflation has begotten, people lose the reckless optimism that engendered the whole wretched excess. Pessimistic, people delay marriage and reproduction, reducing the labor supply, driving up wages and reducing land rents.

Inequality declines, and social solidarity is rebuilt. States can finance themselves as the demands on state benefits fall, and the resistance of taxpayers declines. Domestic harmony begets domestic harmony, as the marital bed regains its former sanctity, and bastardy and license lose their grip on society. But before long confidence once again rears its ugly head, and the relentless inflationary cycle is off again.

This précis of Fischer's central thesis, accurate though it is, will, I am afraid, lead most readers to think that Fischer is the kind of cranky Uncle Norman whose theories we have all had to endure through long wedding dinners. They will be asking themselves how the once-proud Oxford University Press could have been reduced to publishing Uncle Norman. Yet while about a fifth of the book is the work of Uncle Norman, the bulk is a carefully wrought work of historical scholarship, where the individual components are generally interesting and informative. Indeed, the scholarship is so careful that much of the intended audience may be lost because of that very care. Though the book is 536 pages, the text occupies only 258 pages–less than half. One hundred and three pages are taken up by appendices detailing such arcane issues as "Price Revolutions in the Ancient World" and "Moneys of Exchange and Moneys of Account" and documenting sources, and 139 pages are consumed by a comprehensive bibliography of all significant works on price history on all continents.

The problem with Fischer's sweeping analysis is that he gets carried away by his own rhetoric from modest questions about the nature of inflation into wacky world-historical rantings. He is well-respected as a cultural historian, but economics as a systematic field of inquiry is new to him, and it shows. He conflates different types of inflation which have fundamentally different sources. And when this produces predictions that just will not square with the data, he happily acknowledges the exceptions and moves on to proclaim the success of the grand theory.

What do we mean by inflation? In ordinary language, inflation is an increase of prices measured in the unit of account. In the case of England, the pound has been a unit of account since the Middle Ages. Initially, one pound sterling was equivalent to a pound of silver and was composed of 240 pennies. But over time monarchs periodically debased the currency by making coins of the same denomination with less silver content. In 1464, a penny had only about half as much silver as a penny contained before 1334. Thus, as long as money was defined as a specified weight of metal (which it was until quite recently), inflation could have two quite distinct sources. The first is a decline in the price of precious metals relative to the value of other goods such as wheat, which would be common to all countries and out of the control of any government. The second is a decline in the metal content of the unit of account, which was under the control of individual governments and could vary from country to country. In recent years, as "money" became nothing more than paper whose value is defined by fiat, debasement became the only source of inflation.

Thus inflation of the type that has bedeviled the West since 1970 has been driven purely by debasement. In contrast, the three major inflations of the pre-industrial period were primarily of the first type and had little to do with government policy.

Fischer wants to lump these two very different phenomena together and explain them through exactly the same mechanism. But this is absurd. Since modern inflation depends crucially on government policy, it is quite plausible that it can have a social explanation, and thus some of Fischer's ideas may have purchase here. There is a remarkable commonality in the inflation experience of developed countries, for example, in the years since 1970. In the 1970s significant inflation appeared in almost all these nations, and in the 1990s inflation is moderating in the same group of countries. Yet since the 1970s we have experienced an era of floating currencies, so that inflation rates need not be linked across national boundaries. And it is remarkable that we are currently able to maintain nearly full employment in the United States at low inflation rates, when in the late 1970s full employment was only possible with ever-rising rates of inflation.

It is also interesting that while the OECD nations have an average inflation rate of less than 2 percent, inflation is roaring at full tilt in many poorer countries. Prices have increased in the last year by 77 percent in Turkey, 74 percent in Venezuela, 24 percent in Mexico, 11 percent in India, 10 percent in South Africa, and 8 percent in Brazil. Most of these high inflation countries face significant social or political disruption. It is also interesting that just as inflationary pressures seem to be easing in the United States, crime rates have fallen with a rapidity completely unpredicted by criminologists. And as Fischer shows, the era of rising crime in the United States was also the era of increasing inflation.

But there is absolutely no reason to expect that the interesting social correlates of modern inflation will be found when we look at inflation generated by completely different means in the pre-industrial past. For a start, the rates of inflation then were trivial by modern standards, being typically only 1 percent to 3 percent a year. If European societies were going to experience major social disruptions at such inflation rates, then why has the current U.S. inflation rate of 2.8 percent not produced at least a few more signs of the concomitant social despair? If Fischer is correct, I would expect to see at least a few dead lying unburied in the streets.

Fischer would be forced to give up on his theory if he constrained his empirical testing in a more rigorous way. A key plank of his theory, for example, is the link between the growth rate of population and inflation rates. After 1820 the connection between population growth rates and inflation breaks down completely. The late 19th century saw rapid population growth across most of Europe and in the United States, but it also saw persistent deflation, in stark contradiction to the Fischer theory.

What is his response? He prints a diagram showing that in England the growth rate of population is connected with the level of prices. It is a subtle shift, but it completely changes the theory. When we get to the 20th century, Fischer settles on a diagram showing world population and U.S. prices between 1890 and 1990, where we get a nice correlation. Why have we suddenly shifted to world population? We have to do that because, despite the increase in inflation in most of Western Europe after 1970, population growth rates have fallen dramatically. Thus, the same diagram showing prices vs. population for any country in Western Europe for 1890 to 1990, or even for the United States, would show, if anything, an inverse connection between the growth of population and the growth of prices. With techniques such as these you can find empirical confirmation for any theory you want.

Similarly, Fischer's theory demands that inflation be associated with rising inequality. Yet he finds rising inequality in Florence in the period of price stability between 1330 and 1427, and falling inequality in the United States in the inflationary years 1910-1970. Wages always fall in inflations, except for the years 1946-1970. For each of Fischer's laws of inflation, many exceptions can be found and are evident in his own text.

This book seems designed to appeal to a broad audience. There are nicely illustrated maps of Europe in various epochs, and each of the chapters opens with a somewhat forced colorful vignette, from a festival day in Chartres 1224 to the Diamond Jubilee Day of Queen Victoria in 1897. Unfortunately, I can only recommend it to those sophisticated enough about economics to ignore most of the text and instead explore the very useful footnotes and appendices. Unless, that is, you are looking for a present for a favorite uncle with a penchant for strange theories, and you are expecting no imminent nuptials in your family.

Gregory Clark ( is a professor of economics at the University of California, Davis.