Price Revolutions in Historical Context

The price of virtually everything seems to go one way - up. Just ask anyone, anywhere and they’ll tell you that the prices of food, drink, commodities, energy, fuel, textiles, houses, goods and services, and everything in between seem to always increase. They never decrease. Has that always been the case throughout history or do prices sometimes decrease or at least stabilise? If prices do stabilise, how long do they stabilise before they increase again? And when they increase, how long do they increase for and by how much and what is a continuous price increase indicative of? And last but not least, are the prices of goods merely dictated by the law of supply-and-demand alone or are there waves to price increases?

These are questions of history and only history. As it turns out, and according to the remarkable work and careful compilation of “English consumable” price records of food, drink, fuel and textiles since the year 1264 by the historian researchers Henry Phelps-Brown and Sheila Hopkins, most inflation in the past eight centuries has happened in four great waves of rising prices.

The first wave, called the “medieval price-revolution” started in the twelfth century and continued into the early fourteenth century. The second wave, known as “the price-revolution of the sixteenth century”, began in the fifteenth century and ended in the seventeenth century. The third wave, which might be called the price-revolution of the eighteenth century, is believed to have started around 1730 and climaxed in the age on the French Revolution (1789–1799) and the Napoleonic Wars (1790-1815). The fourth wave, called the price-revolution of the twentieth century, began in 1896 and has continued until today 2011.

We are now in the fourth great wave of price-revolution. No wonder then why prices have been on the increase virtually everywhere (except for a short intermission in some nations during the 1920s and early 1930s) since this wave started one hundred and fifteen years ago back in 1896.

The good news is that these waves of price increases end eventually and prices do stabilise for a while (about eighty years or so) before the next wave starts. But the bad news is that these price waves always end with a severe crisis. The fourth great wave that we are in today has not ended. So the question is when and how will it end?

Of course, no one knows the answer to this important question since the study of history cannot tell us with certainty what will happen next. However, the study of history gives us the benefit of much hard-won experience in the past and we can gain a great insight into what to expect by studying how the other three great waves before this one have ended.

To this end, the four waves of price-revolutions differed in duration, velocity, magnitude and momentum but all had a common wave structure and started and ended in much the same way. Each wave passed through four stages.

During the first stage, prices rose slowly in a period of prolonged prosperity. There were no sharp increases in prices and price variability was constant for the most part and within the previous price fluctuations. The second stage began when prices started to vary wildly beyond the boundaries of their previous equilibrium. The third stage began when people and governments realised that this price variability was here to stay and that inflation was on the rise. They responded in ways that drove prices even higher. Governments expanded the supply of money and increased its velocity of its circulations making matters worse and price inflation slowly but surely became institutionalised to a point of no return. This led to the fourth and final stage of the wave. Historian David Fisher describes the fourth stage as follows:

The fourth and last stage began as this new institutionalised inflation took hold. Prices went higher, and became highly unstable. They began to surge and decline in movements of increasing volatility. Severe price shocks were felt in commodity movements. The money supply was alternately expanded and contracted. Financial markets became unstable. Government spending grew faster than revenue, and public debt increased at a rapid rate. In every price revolution, the strongest nation-state suffered severely from fiscal stresses: Spain in the sixteenth century, France in the eighteenth century, and the United States in the twentieth century.

Other imbalances were even more dangerous. Wages, which had at first kept up with prices, now lagged behind. Returns to labor declined while returns to land and capital increased. The rich grew richer. People of middling estates lost ground. The poor suffered terribly. Inequalities of wealth and income increased. So also did hunger, homelessness, crime, violence, drink, drugs, and family disruption.

These material events had cultural consequences. In literature and the arts, the penultimate stage of every price-revolution was an era of dark visions and restless dreams. This was a time of lost faith in institutions. It was also a period of desperate search for spiritual values. Sects and cults, often very angry and irrational, multiplied rapidly. Intellectuals turned furiously against their environing societies. Young people, uncertain about both the future and the past, gave way to alienation and cultural anomie.

Finally, the great wave crested and broke with shattering force, in a cultural crisis that included demographic contraction, economic collapse, political revolution, international war and social violence. These events relieved the pressures that had set the price-revolution in motion. The first result was a rapid fall of prices, rents and interest. This short but very sharp deflation was followed by an era of equilibrium that persisted for seventy or eighty years. Long-term inflation ceased. Prices stabilised, then declined further, and stabilised once more. Real wages began to rise, but returns to capital and land fell.

The recovery of equilibrium had important social consequences. At first, inequalities continued to grow, as a lag effect of the preceding price-revolution. But as the new dynamics took hold, inequality began to diminish. Times were better for laborers, artisans and ordinary people. Landowners were hard pressed, but economic conditions improved for most people. Families grew stronger. Crime rates fell. Consumption of drugs and drink diminished. Foreign wars became less frequent and less violent, but internal wars of unification became more common and more successful.

Each period of equilibrium had a distinct cultural character. All were marked in their later stages by the emergence of ideas of order and harmony such as appeared in the Renaissance of the twelfth century, the Italian Renaissance of the quattrocento, the Enlightenment of the early eighteenth century, and the Victorian era.

After many years of equilibrium and comparative peace, population began to grow more rapidly. Standards of living improved. Prices, rents and interest started to rise again. As aggregate demand mounted, a new wave began. The next price-revolution was not precisely the same, but it was similar in many ways. As Mark Twain observed, history does not repeat itself, but it rhymes.

Unfortunately, many economists in the United States and much of the world today fail to put their urgent problems into their historic perspectives. Consequently, cycles, waves and the study of price-revolutions are generally unknown to most economists, particularly Keynesian economists, political leaders, social planners, business executives, and individual investors even as they struggle with today’s price-revolution and its fast-increasing prices and turbulent financial and economic events. They continue to deal with fires as they arise without regards to history and historical perspectives. We know that this is a grave mistake.

* With contribution from Bruce H. Pugesek, President of Voyageur Research

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