Book Review: The Great Wave by David Hackett Fisher

May 22, 2007

All major price revolutions in modern history began in periods of prosperity. Each ended in shattering world-crises and were followed by periods of recovery and comparative equilibrium. (page 9)

In this fascinating book, Fisher documents four different periods of European history in which prices rose steadily for decades, followed by periods of relative “equilibrium”:

1) Later-Medieval: 1180-1350

2) 16th Century Price Revolution: 1470-1650

3) Industrial Revolution: 1730-1815

4) 20th Century Price Revolution: 1896-present

His primary thesis is that the fundamental cause of inflation is an increase in aggregate demand due to population growth. Once the secular inflation begins, prices rise in a long wave until a crisis of some sort leads to a reduction in population and thus in aggregate demand.

Note: quotes from the book are in maroon italics.


Each wave has similar characteristics:

1. Each wave begins after a period of relative “equilibrium”: After decades of flat prices, population growth begins to put pressure on aggregate supply, especially of food, fuel, land and shelter. It is more expensive to bring new supply to market because the “low hanging fruit” has already been picked. As a result, returns on capital begin to increase. If eggs are worth more, it stands to reason that the hen would be worth more too. Same thing for land, slaves, coal mines, oil wells, and real estate, etc.

The rich benefit enormously while everybody else suffers a decline in real wealth. In the beginning of the wave, the secular nature of the price increases is imperceptible. In fact, the price rises might be mistaken for general price volatility. Instead, this is a demand-driven rise in prices.

2. Money supply begins to increase soon after prices start to rise.
Many forces drive money supplies higher. Velocity of money increases; more money changes hands and more things, such as credit instruments, are used as money. Governments create more money to mitigate the rise in prices — people cannot buy what they need with the money they have, so the government creates more.

Debasing the currency was really no different in the days where gold and silver were used as currency.  Fischer describes the money debasement methods of the Medieval price wave:

Metal coins were also systematically debased. In Italy and France particularly, mint-masters reduced the content of silver in their coins, and increased the quantity of base metal.Individuals acted in other ways to diminish the value of money that passed through their hands. Coins were clipped, filed, scraped, and washed despite ferocious penalties (page 25)

This growth in money supply fuels and aggravates the already-existing inflation. With all the ways – public and private – that the money supply is increasing, the supply of it
invariably rises more and faster than what would have been required to keep prices down.

3. Material decreases in the standard of living for the poor: The economic situation for the poor and middle classes gets steadily worse as they lose purchasing power. By this point, there is widespread understanding that prices are rising. The social order breaks down: there is more crime, domestic violence, and wars.

4. Eventually, as a result of years of social and economic crisis, populations begin to decline. Since population has declined, so too has aggregate demand. During this period of equilibrium, real wages for the poor and middle class increase and returns on capital fall. The gap in wealth between rich and poor shrinks.

5. After some period of relative equilibrium, which is marked by social and political stability, populations rise again and the cycle starts anew.

Many economists would disagree with Fischer’s conclusions. In particular, monetarists such as the late Milton Friedman have argued that “inflation is always and everywhere a monetary phenomenon.” Fischer might say “inflation is always and everywhere an aggregate demand phenomenon.”

Before reading this book, I used to subscribe to the monetarist logic because it has a certain intuitive appeal: if the supply of money goes up faster than the supply of goods available to purchase them, prices will go higher. Fischer is trying to explain why money supply tends to go up in the first place.

In tracing the roots of the 20th Century Price Revolution (which continues today), Fischer acknowledges the monetarist argument but concludes that the root of the price wave was an increase in aggregate demand, not growth of the money supply (see pages 184 – 186):

Some attributed the increase in price levels to an expansion in the supply of gold and silver. In 1886, the fabulous gold mines of Johannesburg had been discovered, entirely by accident. In 1890, gold was found on Cripple Creek in Colorado…. Canadian gold began to flow from the Klondike in 1896. The Alaskan gold rush began in 1898. But these events were part of a long continuum of gold discoveries that had happened through the nineteenth century without rising prices. The rate of growth in gold production throughout the world was roughly the same before and after 1896. Moreover, the pace of secular increase in silver production actually declined during the 1890’s.

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.

This book forces the reader to look at the big picture, and away from short-term price volatility.  Sustained 4% inflation — as we have today — leads to serious consequences.

As in all of the price waves/revolutions documented in this book, there is today a steady increase in global aggregate demand due to rising populations and standards of living.  This suggests that there will be a secular increase in the price of things for which  supply cannot be  limitlessly increased:  food, energy,  water, commodities, land, clean air.

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