The History of “Inflation”


What is inflation? If you ask the average person, the definition they would probably give you would run something like “an increase in prices from an increase in the supply of money”. Merriam Webster reflects this general understanding of inflation, defining it as “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods in services”. This definition is also accepted and used in the broader economics profession as well.

However, there exists a minority of economists and financial analysts, particularly Federal Reserve skeptics, who insist that there exists and older and more correct definition of inflation. In this original formulation, they claim, inflation was definition constitutes an increase in the money supply. We would certainly expect a rise in prices to accompany the larger money supply, but these price increases are not inflation per se. A general increase in prices is a symptom of inflation, but is not inflation itself.

If we look at the word “inflation” itself, these claims appear to have some merit. To “inflate” means to enlarge or expand. To think of prices as enlarging or expanding is awkward phraseology, whereas it makes perfect sense to speak of a money supply as enlarging or expanding.

So, which definition of inflation is the original? Is it true that inflation originally was about money, or has it always been about prices? Even though this is literally a debate over semantics, finding the answer can help us to understand not only how earlier generations thought about money, but also how we should think about it today.

Grab your printing presses, and let’s get started:

Before the 19th century, there was no sense in which “inflation” was used in a monetary context. Samuel Johnson’s famous “A Dictionary of the English Language” from 1755 has two definitions for inflation, neither of which have anything to do with money or prices. Similarly, economic works from the time like Adam Smith’s “Wealth of Nations” talk about an increase in the supply of money and a decrease in its value, but never use the word inflation to describe this process.

Apparently, “inflation” first began to enter common parlance sometime in the early 19th century. Several etymological sources claim that the first recorded usage of the word in an economic context was an 1838 speech by Daniel Dewey Bernard. However, we have quite a few recorded instances of monetary sense of the word before then. In an 1834 publication recording speeches delivered by Henry Clay before the U.S. Congress, several mentions are made of inflation:

“Lands remained at the minimum of $1.25 per acre, while every other purchasable article rose with the inflation of this hot-house currency”

“Each new discount furnishes additional means for new importations; and each new importation furnishes in turn new deposits, and thus the process of inflation goes on…”

“The circular of the Secretary of the Treasury directing them to do so, and the consequent inflation of the currency…”

All of these references speak of inflation specifically within the context of the money supply, not of a price level.

We can find more examples from early in the 19th century. “Economics, Modern Business” is a business textbook published in 1836 which contains a chapter heading entitled, “How Inflation Affects the Price Level”. In another passage, the link between inflation and the money supply is equally as clear:

“But is it possible for us to raise our internal price level; in particular, can we do so my monetary management; and if we can do so, will it not be evidence of that abhorrent thing inflation?”

The implication here is clear that inflation affects the price level, but is not itself a phenomenon of the price level. Instead, we can infer that the author believes inflation to related to the increase in the supply of money.

In “The Maximum of Taxability Made a Measure of the Durability of Any Present Order of Things” published in 1831 by John Bellenden Kerr also implicitly uses the money-based definition, making sure throughout the book to separate “inflation” from “inflation of value”. He writes:

“The directors of such an establishment, enabled to inflate and reduce the value of every description of property when and as they please…”

Notice the distinction made here between inflation and the reduction of value, meaning a general increase in prices. The increase in the money supply, which is itself the inflation, is a separate event from the increase in prices, by which the money’s value is decreased. Again, the implication is that inflation is an increase in the money supply and not an increase in the price level

In the 1864 edition of the Merriam-Webster Dictionary, “inflation” was for the first time given an economic definition: “undue expansion or increase, from over-issue; — said of currency”. While dictionaries certainly don’t decide for everyone else the meaning of words, this appears to reflect along with our other sources an original monetary definition for inflation.

Does that settle it? Does this prove that the original definition of inflation was specifically monetary? As with all things in history, the answer is a bit more complicated than is convenient. Overall, the evidence we have from the time does affirm that the sense in which “inflation” was originally used was usually associated with the money supply as opposed to the price level. However, even in the early 19th century, we can find examples of the term being interchangeably used to indicate rising prices. For example, in “A Letter on Currency Matters” published in 1841 by W.B. Dana, he writes:

“It was said that silver brought inflation. Inflation is bad. But if we are to suffer from one of the two we will rather suffer from inflation than from contraction.”

While subtle, Dana implies here that the increase in the money supply is separate from inflation. He also refers multiple times to “inflation of the currency” and “inflation of prices”, indicating that he also views them both as being inflation in some sense. To be clear, within the same work, Dana refers to inflation in an unmistakably monetary context, such as, “…that the remedy for a currency suffering from an inflation or expansion is contraction”. However, this illustrates that in the minds of some writing in this time, a clear distinction between inflation of the money supply and inflation of prices was not always made.

The monetary definition of inflation would remain dominant throughout the majority of the 19th century, although the price-definition slowly started to creep in more and more. In the 17th Volume of “The Banker’s Magazine”, we can start to see this process at work:

“but I do not think it would have lessened, the inflation of prices which exists, except in regard to gold itself…”

“It is difficult to say how much of late disturbance of values, and the inflation of the currency, should be attributed to the new volume of government paper.”

We these passages, we can see inflation both referring to an increase in the issuance of the currency, as well as a general increase in prices. In the Volume 29 of the same publication, released twelve years later in 1875, we again see the monetary definition as well as the price definition side by side.

“To it we owe the inflation of the currency by 26 millions of greenbacks issued as a force loan…”

“Secondly, Mr. Dun claims that the expansion of the Scotch banks threatens to introduce an element of inflation.”

“These notes were issued after an issue of legal-tender notes had been made, and an inflation of prices had been produced.”

By the time the early 20th century rolls around, the price-definition had almost entirely taken over. In a written record of an appearance by the famous American economist Irving Fisher before the Congressional Committee for Banking and Currency in 1913, we can find the following:

“Mr. Korbly: The greenback is also the cause of some redundancy, is it not?

Mr. Fisher: The greenback, of course, is a fiat money and caused the great inflation during the war, when a great volume was issued.”

“The great inflation from the national bank notes has developed because there was never any clearing, but a constant and in great volume. Any inflation from the outstanding notes under a centralized system, however, would be so inconsiderable that it is really not an incumbrance upon the plan.”

“Mr. Korbly: Now, you will tell me what your opinion is about what the first symptoms of inflation are?

Mr. Fisher: The first symptom is rising interest rates”

While there are also several references to an “inflation of the currency”, we can see that whenever “inflation” is mentioned, it is clearly a reference to rising prices. In “Credit and Financial Management Volume 21” published in 1919, we can see a similar picture:

“As far, however, as interest was paid on government borrowings, to that extent but no further was inflation obviated. This does not mean that it was unsound policy to cause such inflation. On the contrary, some inflation was inevitable.”

“The second great factor in causing inflation has been the practice of borrowing at the banks and elsewhere to obtain the wherewithal to purchase government securities.”

By the early 20th century, invasion of the price-definition had accelerated to the point where the it had mostly won out. The monetary definition still existed, but was now in secondary role. As the twentieth century rolled on, the price-definition would only become more and more entrenched in the public consciousness. By present day, the monetary-definition has all but completely forgotten.

Surprisingly, Merriam Webster would keep the 1863 definition of inflation was kept through multiple editions, until the publication of the 11th Edition in 2003, at which point it was changed to the definition is has today: “a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”. Even though this symbolizes the near-total loss of the monetary-definition, in reality, the price-definition had largely replaced it almost a century earlier.

Looking back on the history, we can confirm the minority view that the monetary-definition of inflation was the original. While the exact date and time that this began to shift is not precisely clear, sources from the time do indicate that there was an original monetary-definition, and a later shift away from it. Even though the slow transition to the price-definition is a subtle change, it still begs the question: why was there a shift in the meaning of the word? Even if the change is mostly trivial, words don’t change their meaning for no reason. Why was the monetary definition discarded in exchange for the price definition?

While I cannot provide clear evidence, I believe the answer is fairly simple: an increase in prices is visible, whereas a monetary inflation is not. Whenever you go to the grocery store and you see higher prices for all the goods that you normally buy, this phenomenon is clearly observable in a way that the money supply increasing is not. We can tell from various statistics (M1, M2, and maybe M3 if you are feeling feisty) if the money supply has increased, but we can’t directly see that with our own eyes. We can’t literally see more dollars entering the economy. Given the close relationship between an increase in the money supply and an increase in prices, it only makes sense that “inflation” would come to be associated with the more visible of these two phenomena. It is easy to point to your grocery bill and say “Inflation!” than to point at a FRED graph of M1 and say “Inflation!”.

Even if the critics are correct about an original monetary definition of inflation, are they correct that the original definition is better? Is the shift of the meaning from the former to the latter a meaningless accident, or should we have a preference for one over the other? Critics of the modern conception have provided several arguments for the superiority of the monetary-definition over the price-definition. When we define inflation as an increase in the supply of money, we are referring to a particular phenomenon. However, when we think of inflation solely in terms of a general increase in prices, we can’t necessarily identify that with a distinct cause. If prices increase because of an increase in the supply of money, we would call that inflation. If food prices increase because of a natural disaster, that would also be considered inflation. However, it seems strange to label those both as being inflation, as their causes are completely separate.

Moreover, the price-definition of inflation runs into difficulties when it comes to the measurability of inflation. As we mentioned, there are a number of reasons that prices could increase. A price could increase because of supply-chain issues, general shortages, increases in demand, etc. Additionally, prices are always in flux as entrepreneurs do their best to bring the prices that they charge in accordance with the market clearing price. These market prices are not just a rigid structure, but always changing and fluctuating with market realities. With an increase in the money supply, we would expect prices to subsequently increase, but they will not increase all at once or all in the same proportion. As a result of the inherent movement and constant adjustments of prices, we can’t find a single number of the increase in prices that will be accurate to any useful degree. We can’t attribute every increase in prices to an increase in the money supply, nor will any permutation of the particular prices within the economy ever be stable for any extended period of time. Consequently, the accuracy of any inflation statistic is vague at best and misleading at worst.

In light of these difficulties of the price-definition, the monetary-definition of inflation stands as superior. It refers to a specific and unique phenomenon, and while there are differing definitions for what constitutes “the money supply”, these can at least be clearly measured. In this case, it was better back in the good ol’ days; the older, monetary-definition of inflation is more coherent and useful than the price definition.

Is there any possibility that the clock might be reversed and the monetary definition might supplant the price definition in public parlance? Not a chance. The monetary-definition, as was stated earlier, is all but forgotten. Only a select few even remember its existence, and fewer still make any serious effort to advocate for the replacement of the modern definition with the older definition.

On the other hand, does it even matter? Is this just a pointless semantic debate? The way in which we define inflation carries implications for how we discuss the topic, as well as how we hold our governments accountable for the way they handle our money. If we view inflation as an increase in money, whenever the printing presses are running, inflation is happening regardless of any increase in prices. Even if the value of money doesn’t decrease, they aren’t off the hook. Debasement of the currency will always ultimately result in the erosion, slowly or quickly, of its integrity. If we focus solely on prices, we miss this completely. Holding our governments accountable means not only focusing on the visible effects of inflation, but also seeing it at its source. The destruction of a currency is seen at the grocery store, but it takes place at the printing press. To avoid the debasement of our currency and society, it is imperative that we keep the older, better, wider view of what inflation really means.