It is commonly taught that we need a stable increase in prices in order for our economy to grow.  We are told, after all, gold does not expand quick enough to accommodate rapid economic gains.  But is it possible for an economy to grow without inflation?  Not only that, can an an economy grow when prices are actually deflating?

This common inflation argument seems to ignore the greatest economic expansion in the history of the world – the industrial revolution.  During the late 1800’s the American economy was booming.  The living standard of the average man increased faster than any time frame compared to today.  While I agree that no one wants to go back and forgo all the advances that have come since, it is irresponsible to ignore the shoulders on which we now stand.

I have heard from multiple intelligent people that they just don’t believe me.  They say that our economy could not have grown quicker during the industrial revolution than any time since, and are commonly under the impression that poverty increased during the Gilded Age.  But if you are to compare apples to apples, the industrial revolution experienced more growth than any time frame.  The middle class was created during late 19th century.  In 1800 the average American was a farmer, destined to a short life of poverty.  By 1900 that had all changed.

Please refer to the graph below.  We take into account 3 different – 25 year time frames in American history: 1878 – 1903, 1946 – 1971, and 1987 – 2012.  If the time following the second world war was actually a larger expansion in the economy and living standards of citizens, you would expect a larger increase in both life expectancy and average income per person.

According to the information found at GapMinder, it is very clear that the time preceding the Federal Reserve was actually a larger economic expansion in every measurable way (these numbers are inflation adjusted).  When you take a look at the information on that site, it is clear the average income and life expectancy is greater today than in 1903, which is why no one would want to go back to that time (straw-man argument).  The point is, if we were to see the same economic expansion during the late 20th century as we had during the late 19th century, we would all be living much longer with a much larger income per capita today.

It is also important to note that we do not feel GDP as a good indicator of economic growth, especially since it includes government spending.  But even using the government’s GDP numbers, the fact still remains.  The only thing that would change this chart is if you included World War 2, since the massive government programs exploded GDP.  But it is obvious that when food is being rationed, the living standards are not increasing for the average person.

Let us not ignore the third part of this graph, the value of the dollar.  After the Civil War ended and we no longer printed greenbacks, our country relied on a hard money standard without any central bank.  We experienced some boom and busts (though I attribute that to legalized fractional reserve theft), but by any standard they were not as long nor as severe as the recessions experienced since.

No matter the source, you will find $1 held in 1878 would buy you far more goods in 1903.  This means the value of the dollar INCREASED and we experienced a DEFLATION of prices.  This goes against all economic theory you have been likely been taught.  While our economy did not expand nearly as quickly, the two other 25 year periods experienced roughly 50% devaluation of the dollar (or 50% inflation of prices).  This is using the government’s own CPI numbers, and many would consider that we actually experienced far more price increases during the 1987 – 2012 time frame (due to the manipulation of the CPI calculation).

History is not on the side of modern day Keynesian economists.  Yes life is better now, society is more accepting of different behaviors and ethnicities, but that cannot ignore the growth we experienced and the shoulders on which we now stand.