The Children of a Long Inflation

If you’re invested in ‘sin’ stocks, here’s a thought: If history repeats, there might be a 50 year decline in the consumption of alcohol, not to mention a lower crime rate and the arrival of less bastard children.

That’s what happened during the ‘Victorian Equilibrium’ of 1815 to 1914 after all.

The Victorian Equilibrium is how author David Hackett Fischer describes the deflation in the 19th century after the major price rises that preceded it. He describes this in his 1996 bookThe Great Wave: Price Revolutions and the Rhythm of History.

Fischer’s contention, then and now, is that the world has experienced four ‘Great Waves’ of rising prices since the twelfth century. They range in length from 80 years to almost two centuries, depending on which one you pick. These Great Waves of price instability brought war and hardship as well as human degradation and disillusionment.

Here’s how he shows the Great Waves in his book:

When the Great Wave finally breaks, however, the world enjoys periods of equilibrium that result in a cultural flowering or advance until the beginning of the next Wave. That’s what happened in Victorian England from 1815 to 1914.

I won’t dwell on the cultural advance. As this is The Daily Reckoning, I want to know what the period of equilibrium meant for the money. David Fischer describes it likes this: ‘Long-term inflation ceased. Prices stabilized, then declined further, and stabilized once more. Real wages began to rise, but returns to capital and land fell.’

click to enlarge

Source: The Great Wave

In England, as you can see, prices were cheaper in 1890 than they were in 1819. The post office, for example, etched prices in brass. That’s how little they expected prices to move. Queen Victoria’s government could issue gilts (bonds) paying 2% — and for investors, that was a healthy return.

What’s interesting is 1812–1914 covers the heyday of the classic gold standard. Sound money advocates attribute this relatively peaceful time and economic expansion in Europe partly or wholly to gold, with free trade and exchange flourishing.

Read the rest of this article at The Daily Reckoning