Inflation seems to be a relatively new thing in economics, only being a major concern since about 1940.
Looking at [this UK Currency graph](https://www.google.com/url?sa=i&url=https%3A%2F%2Fmonevator.com%2Fa-history-of-uk-inflation%2F&psig=AOvVaw2m1_C7lFBlK_s-ePJDySaV&ust=1691140545682000&source=images&cd=vfe&opi=89978449&ved=0CBAQjRxqFwoTCOCx8s2TwIADFQAAAAAdAAAAABAJ) or [this US graph](https://images.squarespace-cdn.com/content/v1/50060e33c4aa3dba773634ec/1464789250138-XL20G32RKBAYP87JGP74/image-asset.png), inflation/deflation was not a continuous thing until the modern era.
Is this because of fractional reserve banking, or constant government deficits in both countries? Or both? What changed in economic policy – perhaps the funding required for modern government programs?
Or perhaps this effect isn’t as new as I perceive – at least in the case of the United States. [This graph](https://upload.wikimedia.org/wikipedia/commons/thumb/2/20/US_Historical_Inflation_Ancient.svg/1200px-US_Historical_Inflation_Ancient.svg.png) shows inflation and deflation to be evident in the past, but they balanced: so why don’t they now?
Surely an idealised society wants very little inflation, maybe around 0.5%, just enough to allow for debt to deflate and ‘incentivise investment’, but nowhere near as much as today’s salary-eroding amounts.
In: 2
Pre-WWII, most industrialized societies operated (more or less) on an inflationary/deflationary cycle–much like the last graph you posted. (Although I’d note that the further back we go, the less accurate those graphs can be–especially since a codified, universal currency for the US didn’t exist the first third of that graph.)
But they didn’t call them “recessions” back then, they called them “panics” because, quite frankly, deflation is *bad*. We don’t want that. We don’t want “balance” because that means people suffer as much as they prosper. So every green spike on that graph meant people generally suffered.
(To put it in Eli5 terms, by targeting inflation we do reduce our prosperity–but not by *that* much. The amount of prosperity we sacrifice is nowhere *near* the deflation we would get otherwise, so the tradeoff on net is absolutely worth it.)
With changes in monetary policy after central banks became the norm, the tradeoff settled on having a consistent but small amount of inflation–the target for most nations is roughly 2%. Any lower than that and we risk deflation.
Latest Answers