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All That Is Solid Melts into Inflation

Policymakers in Western industrialized countries would do well to remember that periods of high inflation historically have led to much bigger problems. By trying to bind societies together with money, central banks have repeatedly sown the seeds of broader political and social dissolution.

PRINCETON – Rich Western industrialized countries appear to be caught in a time loop, with unexpectedly higher inflation bringing back not just memories of the 1970s but also that era’s policy debates and the political insecurities. Is inflation always and everywhere a monetary phenomenon, as Milton Friedman insisted? Or is it a consequence of fiscal over-extension – or simply a symptom of a more general democratic malfunctioning?

The debates of the 1970s were not just about technical matters of macroeconomic management. They also raised doubts about the sustainability and legitimacy of the Western model of democracy. The world was beset by geopolitical instability, and the United Nations General Assembly endorsed calls for a New International Economic Order. And now that many of the same old political and geopolitical issues are heating up again, inflation is a thermometer. As more money chases fewer goods, prices rise – the economy becomes feverish.

During periods of monetary innovation, however, it becomes harder to tell what money even is. No one would dispute the fact that monetary innovation has been proceeding at a breakneck pace over the past decade. But it is worth remembering that the 1970s also featured a financial revolution, one that blurred previously hard distinctions between money and non-money. This was partly a consequence of inflation, which prompted bank customers to flee from non-interest-bearing checking accounts to alternatives such as certificates of deposit or accounts in non-traditional banks.

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