FWIW # 6 A History Lesson June 2020

In 2017, the following history lesson was published by a sister publication to For What It’s Worth. The comments have relevancy today. They have been updated and the following commentary focuses on secular issues rather than just investments.

There are times, such as these, where looking back at history may reduce tensions and pessimism by helping us understand what is happening is not unique to today. In 1997, I had the good fortune to read THE GREAT WAVE, Price Revolutions and the Rhythm of History by David Hackett Fischer (Oxford University Press, 1996). Re-reading it brought clarity to what is taking place today. This For What It’s Worthwill point out some common points of interest in each wave.

The first great wave in the Western World was in the period 1180-1350. Here are some interesting facts:

1. Throughout history, changes in political/societal factors, including economic issues, start quietly and slowly, usually when the population is distracted by a period of peace and equilibrium.

2. The prime mover of the increases in prices was population growth, followed by an expansion of the money supply.

3. Population growth stemmed from an increase in fertility rather than a slow down in mortality. Women married earlier and chose to have more children.

4. The demand for life necessities went up faster than the supply could change, thus creating a steady price rise. There were still cycles of abundance and famine, but the bias was for price changes to be sharper to the upside. Energy prices were the most sensitive after food prices..

5. Since manufactured goods could be increased to meet an increasing demand, the price rise in these commodities was less.

6. “This distinctive pattern of price-relatives was typical of a demand-inflation. It appeared in every great wave without exception.” (page 23)

7. Money velocity increased, adding monetary inflation to the demand inflation.

8. In addition to the increase in money velocity, the monetary authorities across the western world (Europe mainly) increased the money supply by debasement of their currency.

9. In the beginning, wages kept up with price changes, but fell behind as time went on. Rents and interest rose sharply as wages were falling allowing landowners to keep up inflation. Interest on borrowed money in many places was higher than inflation. The growing gap between returns on labor and capital is typical of price revolutions in modern history. “... A rapid growth of inequality that appeared in the later stages of every long inflation.” (Page 29)

10. Public deficits surged in the latter stages of the price revolution, gravely weakening the scope of government.

11. Climate changes had a dramatic effect on the price revolution during this period.

12. The rich and powerful elites opposed economic controls so they could profit from the instability. The rich hoarded foods and energy sources to profit from future price increases.

13. Crime became widespread, as the population tried to exist. Governments squandered important resources on wars. Instability increased across Europe.

14. The Black plague and other disease epidemics took hold and spread rapidly, since people were starving. The price revolution wave crested around 1350. Europe was in a shamble. Europe society slowly began to mend.

15. The Equilibrium of the Renaissance began around 1400 and lasted till 1470.

The second great wave of price increases lasted from approximately 1470 to about 1650. Here are some points of interest.

1. Price rises began slowly and quietly, unnoticed by most of the people. Prices rose an average of 1% a year for 180 years.

2. The initial cause of the price revolution of the 16th century was population growth, followed later by monetary debasement and wars. The population growth came from the period of economic equilibrium with rising real wages and rising expectations .

3. Food and energy rose the fastest and wages began to fall behind the increases. Political responses to the price increases caused prices to rise even more. Hoarding and speculation went hand in hand with panic buying and degradation of commodities.

4. Landowners and people with capital benefited by raising rents and interest charged on loans. The increase in capital costs and rents increased the civil unrest, particularly in rural areas.

5. Some historians say the influx of Western Hemisphere gold and silver after 1492 was the cause of the price revolution, but the facts show the price revolution had already begun and was only reinforced by the increase in imported gold and silver.

6. By the mid-16th century, governments began to put in place regressive taxation and the elites pushed governments to shift the weight of taxes to the middle class and the poor, even while governments were spending more than they took in, leading to heavy borrowing by governments and the upper class at high interest rates.

7. The price revolution of the 16th century was connected to and influenced by the Reformation.

8. By the late 16th century, price swings became more volatile and had a greater amplitude.

9. There were four harvests that failed from 1594 to 1597, leading to famines and epidemics which swept the continent.

10. Countries began to declare bankruptcy, while other countries were constantly increasing their debts. Not only was unrest caused by the price revolution and monetary debasement, but the governments participated in endless wars, squandering wealth needed to keep the government and society solvent. “During the entire century between 1551 and 1650, peace prevailed throughout the continent only in a single year (1610) - a record unmatched since the fourteenth century.” (Page 96)

11. By the beginning of the 17th century, Europe was gripped by what we now call stagflation,

12. In 1591, climate change started. Unlike the present concerns, this change, and others like it have been collectively call “the little ice age.” Glaciers increased in size, Alpine rivers sent ice through many towns. Harvests were disrupted for many years, adding to the social distress, including an increase in crime, correlated to the rise and fall of prices during this long wave. This crime and inflation pattern is evident in every price revolution.

13. The famine, social unrest, and epidemics led to an increase in mortality and a drop in fertility, leading to a decline in population.

14. The price revolution was significant but not as devastating as the first great wave, partly because the magnitude of the cycles and because the productivity, production, and per capita income of citizens were greater.

15. The Equilibrium of the Enlightenment began in 1660 and lasted until 1730.

“The price of grain ceased rising, fell sharply, and then began to find a level. Food and energy came down, manufactures went up, and the general price level began to fluctuate on a fixed and level plane. Wages rose. Rents and interest fell. The distribution of wealth and income became a little more equal. Population, production, and productivity grew slowly.” (Page 103)

Climate change impacted the Equilibrium as well. The weather changed wet and cold again. Glaciers advanced through alpine valleys. “Artic icefields (sic) expanded so far to the south that Eskimos in their kayaks appeared in Scotland.” (Page 107)

The third great wave began approximately in 1729 and lasted till 1830.These were some of the interesting factors.

1. The price rises began slowly but unsteadily. It took awhile for people to notice this change was difference than regular cyclical changes.

2. Price rises spread to the Americas and the rest of the global economy during this price revolution.

3. Necessary items, such as energy and food, were the first to experience the price increases. Manufactured goods were more stable since their supply could be increased faster.

4. “The prime mover of this price-revolution was the increasing pressure of aggregate demand, caused by an acceleration in growth of population.” (Page 123) The population increase happened mainly because of a decline in age at marriage and a small rise in fertility.

5. Agricultural production increased but productivity declined. Rising population and falling productivity created cost push inflation.

6. “There was no “inflationary psychology” in the period from 1725 to 1755. Price stability was assumed to be natural and normal in the world.” (Page 127)

7. Governments and individuals responded to price rises with monetary expansion. Money and velocity increased. Commercial paper became increasingly used as money, changing hands in multilateral transactions. Paper money rather than metal coins was introduced into the monetary system. Monetary expansion and debasement reinforced the price revolution, but did not start it.

8. Governments issued so many bonds a class of speculators and investors was created. In London, periods of war and rebellion led to substantial drops in the price of British government debt as interest rates surged. Across Europe, interest rates steadily rose during the 1700s.

9. As the price revolution continued, the rich and powerful did well as rents and interest fluctuated but generally went higher. Labor wages rose in nominal terms somewhat but failed to keep up with inflation, as the cause of the price revolution, increased population, depressed real wages by expanding the labor force. (Sound familiar? The elites today push for increased illegal immigration to lower real wages.)

10. Declining real wages in the 18th century did not bring about famine and epidemics as it did in the 14th century wave or a decline in the population as it caused in the 17th century. “Here is a striking paradox in the history of price revolutions. As one of these great waves followed another, rates of inflation increased but human suffering decreased.” (Page 132)

11. Three factors led to the reduction in human suffering during inflationary periods: (1) the expansion and integration of world markets, (2) fewer people were living on the edge of survival when inflation happened, and (3) the growth of welfare programs, even though limited, prevented starvation. These factors limited the effects of the great wave, while at the same time, accelerating it.

12. There were three commodity price cycles in the 18th century: 1739-41; 1755-58; and 1776-81, periods when prices surged higher. Each period corresponded to times of war.

13. As the great wave rolled on, inequality grew in both Europe and America. Intense resentment against the ruling powers and elites developed as the 18th century was in its last decades.

14. “Homelessness increased.” (Page 136) “The disruption of families also increased. Through the period 1730 to 1810, many studies have found a rapid rise in the proportion of children conceived and born out of marriage.” (Page 136)

15. The powerful elites were able to deflect new taxes from themselves to the middle and lower classes, such as the American colonies, in the case of the British.

16. Speculators were rampant, and financial firms and speculators began failing in large numbers causing financial crises in many countries.

17. The great wave of the 18th century crested during 1796-1813. During this time, climate changes impacted social and economic conditions. First, it was hotter than usual conditions for three years and then colder than normal for six years, 1782 to 1787. These climate changes came when the social system was fragile, and the world experienced a world depression in commerce and industry. While fewer people starved, more were overcome with rage. Revolution swept the world. Countries went to war.

The Victorian Equilibrium followed from 1820 to 1896. During this period, real wages rose while prices fell. Returns on capital fell steadily during the 19th century. As population increased, prices were relatively stable, since the rate of change in population was essentially the same in the rate of change of prices. Even though the world experienced a period of price equilibrium, financial panics and depressions still took place. In the United States, they tended to recur every twenty years: 1819; 1837; 1857; 1873; and 1893. During this period, climate change added to the economic equilibrium by bringing to an end the “little ice age.”

The fourth great wave began in 1896 and is still in some point of it’s existence. Let’s look at some factors:

1. Most importantly, this wave is another global wave and has been since it began.

2. The wave began slowly like the three before it. Prices in the U.S. had no long term secular change from 1814 to 1896, just cyclicality associated with financial panics and the Civil War. After 1896, around the global prices began to rise between 1% and 2% per year.

3. Prior to 1896, people were as scared of deflation as the current world is concerned about inflation, so they were not concerned about initial inflationary evidence.

4. Until the 1907 financial panic, the U.S. experienced prosperity.

5. American economists blamed the rise in prices on an expansion of the money supply. This was wrong because the price revolution was global in nature.

6. “Monetary factors would play a major role in the price revolution of the twentieth century, but the great wave itself grew mainly from a different root. It was primarily (not exclusively) the result of excess demand, generated by accelerating growth of the world’s population, by rising standards of living, and by limits on the supply of resources, all within an increasingly integrated global economy.” (Page 186)

7. Global population began to accelerate. The annual increase in population from 1900-1950 was nearly double the rate between 1850-1900.

8. Cultural expectations around the globe changed with changes in voting rights is many countries as the new voters expected governments to develop policies to serve social welfare, health care, old age security, mass education, and unemployment insurance, rather than just for the wealthy.

9. Government and monetary policies added to the growing upward pressure on prices. At the same time, frontiers around the world began to shrink due to migration and population expansion.

10. From 1896 to 1962, real wages increased. The length of this real wage rise was longer than the past three waves due to trade unions, democratic policies, and welfare state policies. Financial equality between social groups expanded until and through the 1950s.

11. Great waves do not change even though there are always periods of cyclical volatility such as experienced in 1907, 1920, 1930-1941, 1970s, 1982, 1989, 1994, 2000, 2008. and now 2020.

12. The 1918, global pandemic reduced population and demand, causing prices to retreat for awhile. We may see the same in 2020; however, food prices in the last three months have increased at a high rate.

13. The Fourth Great Wave is different from the first three waves in two ways: (a) the rate of price increase is twice as high as any other wave, and (b) prices don’t go back to where they started, they just go up slower when the economy moves into a recession or financial crisis.

14. Wealth inequality began to build as the price revolution progressed, accelerating after 1965.

15. Social, governmental, business practices and cultural factors have built a floor under inflationary expectations which grew consistently throughout the 20th century.

16. It’s important to understand this price revolution is global, not confined to U.S.

17. Monetary policies are as much at fault for the price revolution as being helpful in suppressing it. Volatility through “policy recessions” have hurt more than helped contain prices. These monetary policies have added to the wealth inequality since 1980. These same policies have weakened the structural strength of the global monetary system. Real wages began to drop after 1973 and continued until at least 1996, when the book was published. (Real wages continued to drop until 2017. ) Central bank control of interest rates rather than the market setting interest rates has increased volatility while actually hurting middle class and poor citizens.

18. “Economic instability in general, and inflation in particular, took a heavy toll in human suffering. Crime increased rapidly around the world during the period from 1965 to 1993.” (Page 225) This same pattern was seen in the 14th century, 16th century, and 18th century great waves.

19. In the 16th century and 18th century great waves (there was not good records in the 14th century wave) a clear impact of the price revolution was the breakdown of the family, an increase of births outside of marriage, and increase in crime and drug use. The three major social problems today, crime, drugs, and family disruption, are correlated with rates of inflation.

20. In the 1990s, population growth diminished, and inflation rates fell, but did not go deflationary as in past waves.

21. In every great wave, climate change issues exhibited themselves. The difference between the current situation and the three previous great waves is that there were real climate issues in the past, not hypothetical projections into the future. In addition, the climate changes in the past were from the climate turning colder and disrupting the supply of resources, including expansion of glaciers, all of which diminished after a few years and prices of resources declined. Today, the climate change efforts by the global elites focus on diminishing the developed countries ability to supply a broad range of goods, both natural and manufactured, by restricting manufacturing efforts below the increasing population’s demand in developed and developing countries in order to drive prices even higher than usual.

The 20th century great wave continues. The other three waves had durations of between 80 and 180 years. Where are we in the 20th century great wave? What does the future hold? Do the great waves give us guidance as to the future? First, just by looking at the factors listed in this For What It’s Worth it can be seen that there have been

common characteristics to each wave. Population growth and optimism about the future triggered long-term price revolutions which caused significant imbalances and instabilities in the Western world in the first wave and globally in the subsequent waves. Monetary factors such as currency debasement, excessive public debt, and wars added to and compounded the price revolutions. All three conditions have characterized the present global economic condition.

What is both fascinating and of concern is that each subsequent wave had a price revolution average annual increase of inflation greater than the wave before it. The 20th century wave between 1896 and 1996 (when the book was published) saw an average increase in prices of approximately 4% while the first wave in the 14th century saw prices increase on average .5% per year. What is the greatest concern for us is the 20th century wave rate of change. We know, because it is in the records, governmental calculation of inflation has deliberately under recorded price changes. This started with Alan Greenspan at the Fed and has continued ever since. (He openly testified such before Congress.) Even so, the higher average annual inflation is due to several factors, the most important ones being (1) social safety networks such as welfare, free education, and health care for the poor, (2) government policies designed to foster higher prices for basic commodities, such as food stamps, agricultural subsidies, and tax incentives for housing spending., and (3) the squandering of resources in endless and unnecessary wars.

Monetary policy has been designed to reinforce inflation as well. Removing a specie backed currency from the system (1970s) tends to give more opportunity for prices to rise due to monetary debasement. Policies that kept interest rates low through long periods of economic expansion tended to create more demand relative to the supply of goods and services. Periods when the economy was growing robustly, led to the monetary authorities raising interest rates to “cool” the economy but raising the cost of capital in the economy which in turn caused those higher capital costs to be passed through to the consumer.

The social crises of our current day and time—income inequality, drugs, the breakdown of the family structure, high out-of-wedlock babies, and terrorism—are all symptoms of the final stages of a great wave. Financially, the financial crisis of 2008 and its subsequent recession were likely the wave cresting. Monetary policy, however, along with social welfare issues, interrupted the natural repairing of the economy by supporting the incompetent actors rather than allowing the natural correction of failure. The instability and unrest social aspects are still unfolding.

Within Great Waves are ordinary cycles of prices and markets going up and down depending on the short-term cyclical forces of supply and demand. Further, the characteristics of a great wave differ due to the fact the wave is a human influenced social and economic event. Decisions made at the time the wave is in place will influence the magnitude and duration of the wave. These aspects are critical to using this knowledge correctly. No one knows the future because the decisions that make the future aren’t made until the future. Fear of being accused of not doing enough and being blamed for the inevitable is leading monetary and political elites to push the necessary adjustments out in the future when the consequences will be far greater than they are now.

Once a wave crests, a period of price equilibrium slowly sets in. Optimism grows, real wages grow, the returns on capital fall, and social institutions and structures move to the forefront. Crime will fall, drug use will fall, and family structure will stabilize.

In all likelihood, we ware moving from the tail end of the 20th century wave to this period of price equilibrium. The pandemic of 2020 interrupted this progress. Further, studying the four great waves makes it clear that the price revolution trigger, while complex, never started until there was a large increase in the population and the demands the expanded population put on the social structure of the countries. Over a million migrants have moved into western Europe. Millions of migrants from Latin America and untold amounts from the middle east have moved into the United States. Will this population shift rekindle a price revolution, continuing the 20th century great wave? The potential is high. Federal Reserve policies and manipulation of reported inflation is distorting the wave.

Even if the 20th century great wave has crested, and we are entering a period of stable prices and low interest rates, history indicates the current interest rate level is too low. Unwinding the monetary policy of the last 10 years will cause some disruption, as monetary authorities erase the extra liquidity they created. Prior to 2008, the Federal Reserve balance sheet was approximately $800 billion. It is now over $7 trillion and climbing. By repressing interest rates, the Fed and other central banks are driving money into the hands of speculators and hurting creditors. How this manipulated environment ends is not knowable. At some point, however, a revolt by creditors may happen. If it does, the inevitable climax of the 20th century great wave may finally set the stage for true price stability and a building of a sound economy.