May 2, 2016 0
The Industrial Revolution brought with it a huge growth in productivity. So much so that while in the 1700s some 90% of the population had to work in agriculture-food growing; today less than 2% of the population is occupied with this task. In an ecosystem with a limited amount of money, as it was throughout the 18th and 19th centuries, such a growth in productivity would cause prices to drop and living standards to rise. Such was the case during most of the 1800s, excluding the Civil War years. On average, between 1815 and 1895, prices went down 4% annually. 85 Meanwhile, annual per capita GDP went up around 1.5% a year, spelling a threefold increase in per capita GDP between 1820 and 1900.86 So while prices were dropping sharply, output was skyrocketing, a combination that yielded an important improvement in most Americans’ standard of living.
This kind of amelioration is, after all, the ultimate goal of human economic activity. After all, people do not eat gold, they eat products, hence what they need to improve their livelihood are more products not more coins. In the last thirty years of the 20th century, the world experienced a similar important shift: the Digital Revolution. This extraordinary technological milestone also brought huge improvements in productivity, so much so that we cannot even imagine running the world today without computers and the Internet. Yet prices for the most part did not go down. To the contrary, prices kept climbing. How can this be? Where did all this productivity growth go?
The simple answer is that money creation consumed this price reduction. All the productivity gains, which should have translated into society-wide improvements in living standards were instead eaten up by the flood of newly created money. Money creation produced inflationary pressure that pushed prices back up. Instead of lower prices and a higher standard of living for all people, the government got away with printing more money and the financial sector with taking on more leverage. In essence, the engines propelling the money creation— the oppressive costs of an increasingly complex society and government, the financial demands of a massive military-industrial complex, and the endless malinvestment bubbles— consumed the price reduction that would have otherwise been enjoyed by all the public. Hence, for all intents and purposes, our vast productivity gains were struck by a mammoth hidden tax, similar to inflation, yet even more subtle.
The fact that CPI increased by “only” an official average of 2.5% a year is not a result of some sort of miraculous new reality where unlimited money creation has no inflationary consequences. The reality is much bleaker than this fantasy. It was due to the Digital Revolution that such a super stealthy tax— an unthinkably huge seizure of resources and a transfer of purchasing power from the masses to the few— could have occurred while producing a “reasonable” official rate of inflation.
Steinhart, Chanan (2015-04-11). A Brief History of Money: How We Got Here and What’s Next ? (Kindle Locations 3773-3785). . Kindle Edition.