There is a long-standing idea that inflation acts as a majorly destabilizing force for society. While some critics argue that inflation even leads to socialism, the immediate reality is simpler. Inflation causes a deep dissatisfaction with politics because it affects almost everyone. While only a small group of people follow the stock market or economic news closely, every person notices when the price of groceries or gasoline goes up. This makes inflation particularly salient for swing voters and those who are otherwise politically disengaged.

The thing about inflation is that it affects almost everybody. Almost everybody is going to be buying groceries or gasoline, they are going to notice the prices going up. Whereas only a relatively small proportion of the population actually really closely follow economic news.

Economists often view unemployment as more damaging than moderate inflation because of long-term effects like scarring. In a textbook, inflation is often seen as a nominal scaling issue with minor adjustment costs. However, the political and psychological reality is different. People find inflation more pernicious than unemployment. A comparison can be made to how companies handle recessions. It is usually better for morale to fire a small percentage of the staff than to cut everyone's wages. A universal wage cut causes mental destruction and destroys loyalty because employees feel their relative purchasing power is decreasing.

Cutting everyone's wages by 14% is like pure mental destruction. Everyone loses their minds. All your employees become extremely disloyal. It basically never happens.

This psychological reaction happens because inflation is not just about the overall price level rising. It is about relative prices being distorted. When prices go up, but your nominal salary stays the same, your purchasing power drops in a way that feels personal and unfair. This distortion is the mechanism that explains why inflation becomes so destabilizing for a society.

In New York City, a new mayor suggested taking over bodegas to combat high prices. This illustrates how the public might support radical policies when they are frustrated by inflation. Mark points out that these demands for price controls mirror the 1970s. During that time, Richard Nixon implemented similar rules. While these policies are popular with voters, they often lead to shortages and scarcity.

Economists can walk you through why price controls are a bad idea, but they instinctively garner quite a lot of support amongst the electorate. Of course, price controls don't solve a problem, they just generate more scarcity.

Economic theory shows that price controls do not solve the underlying issues. Instead, they create shortages. However, they remain popular because they seem like a direct solution to a visible problem. This push for government intervention is a sign of the general malaise and frustration people feel about their economic situation.

The first 200 years of the Roman Empire were a period of remarkable monetary stability known as the Pax Romana. During this time, the economy was highly monetized. Ordinary people earned silver wages and used bronze coins for daily purchases. Even though bronze coins lacked intrinsic metallic value, they circulated widely because people trusted the stability of the system. This environment supported a complex market economy with financiers, bankers, and credit for investments in trade and property.

We are just seeing the tip of the iceberg. There is a huge amount of economic activity going on which has no record in the sources. This suggests a market economy by pre industrial standards.

This stability eventually came under pressure from external threats and internal political turmoil. As Germanic tribes and Persians became more organized, the Roman Empire faced higher military costs. Emperors needed to pay the army and provide large bonuses during transitions of power. To fund these expenses, the state turned to monetary debasement. This involved reducing the silver content in coins while maintaining their nominal value, a process that allowed the government to generate revenue through seigniorage.

Inflation remained low for a long time because of the established trust in Roman currency. Some estimates suggest inflation was as low as 0.1 percent per year during the first two centuries. In such a stable environment, people do not worry about the future value of money. However, once the government began clipping coins and increasing the money supply to meet fiscal demands, this trust started to erode. This historical shift mirrors modern periods of stability where low inflation becomes an expected norm until a crisis forces a change in policy.

Inflation becomes deeply disruptive when it exceeds expectations and breaks existing contracts. In the Roman Empire, the trouble began with a fiscal decision to pay soldiers more by debasing the coinage. This move was part of a broader militarization of the state. While inflation remained modest for several decades, it gained momentum as political instability worsened. By the late third century, inflation ran away from the control of Roman authorities. During this crisis, the empire's financial institutions essentially vanished. Historians note that while evidence for banks and commercial lending exists for the early empire, there is almost no evidence for these systems after 300 CE.

Prior to the late third century, we can infer that there are banks and there is some kind of commercialized lending system. We don't have the details of it, but after 300 zilch, basically. The empire is really weak at this point. This is the height of a third century crisis.

Diocletian eventually stabilized the empire and attempted to control inflation through a famous price edict. He fixed prices and established severe punishments for merchants who violated the ceilings. While the edict provides a wealth of data on the relative prices of goods like wine, it failed to fix the underlying economic issues. Later, Constantine the Great restabilized the monetary system by issuing a gold coin. However, this created a gold-based economy that lacked small change for ordinary transactions. Instead of being paid in flexible currency, soldiers began receiving their wages in kind, such as wool, grain, and olive oil.

This shift away from a fully monetized economy harmed impersonal trade. Mark explains that sophisticated market economies rely on the ability to trade with strangers using currency. When currency fails, people revert to local credit and personal relationships where the grocer knows the buyer. Rome lacked the institutional expertise or economic theory to manage high inflation with modern tools like index-linked loans. They could not implement a 1980s-style disinflation because the necessary theoretical frameworks did not exist yet.

The long-term consequence was a total loss of institutional legitimacy. Trust in a currency is cumulative and takes centuries to build. By debasing the coinage for decades, the Roman state destroyed that trust. Even after they stopped the inflation, the damage to the economy and social fabric remained. It is far easier to throw away political trust in a short period than it is to build it back up.

You build up this trust of the currency you get from us is trustworthy. You can even trust the valueless ones because that's how trustworthy currency from us is. And then you debase it for a few decades. It takes hundreds of years for them to get the trust back. It is one of those things that is really hard to build up and fairly easy to throw out the window.

A monetary economy has an inherent fragility. Politicians are often tempted to generate inflation because they see it as a free lunch. However, this eventually creates high costs that require farsighted leaders to implement institutional constraints. Re-establishing credibility after a period of high inflation is incredibly difficult and expensive. This was evident in the 1980s when figures like Margaret Thatcher and Paul Volcker had to accept high unemployment to rein in rising prices.

You can fool people once, but if you keep trying to fool them, then fool you. Basically you're cashing in the trust you previously built up.

Trust is a finite resource. If people expect a certain level of inflation, they can price it into their long term contracts. But when inflation wipes out debts and assets over a decade, it destroys the public trust in institutions. Mark explains that this is why one off wealth taxes or currency debasements are risky. Once you do it, the public knows it could happen again.

Historically, the British state managed to debase its currency during wars without losing total legitimacy. During the Napoleonic Wars and World War I, Britain suspended the gold standard to fund military efforts. They were able to maintain trust because they made a credible commitment to return to previous price levels once the wars ended. This return was often painful. When Winston Churchill decided to return to gold in 1925, it led to high unemployment and social unrest. While this re-established a nominal anchor for the economy, it came at the expense of workers whose wages did not keep up with the changes.

There is a strong connection between economic stability and the preservation of property rights. Between 1815 and 1914, Britain experienced nearly zero inflation over a century. During this period, institutions like Parliament and property rights were not only maintained but became more entrenched. As inflation remained low, policy shifted toward more libertarian ideals, such as the repeal of the Corn Laws. This suggests that when a currency remains stable, it creates the necessary conditions for institutional improvement and a move away from government intervention.

So for me, the stable currency is clearly a precondition, undoubtedly preconditioned.

While the high point of laissez-faire in Britain was around 1850, the subsequent shift toward more government involvement in the 1880s was not necessarily a decline into socialism. Instead, local and national governments began focusing on positive infrastructure projects like sewers. Mark notes that these projects were possible because the government had gained legitimacy. A stable currency over a long duration provides the bedrock of trust. This trust allows a government to pursue large-scale improvements without resorting to the desperate price caps and nationalizations often seen during inflationary periods.

Inflation is often seen as a trigger for bad policies like price controls. A more profound effect is how it distorts reality. Inflation acts like a pair of blurry glasses. In a stable economy, prices are in focus. During inflation, prices rise at different speeds. This makes the world feel insane because the relative value of things becomes confusing. People feel as though they are being stolen from. They lose their sense of what a reasonable price is.

I think that the better way of thinking about it is it is almost as though the prices that we have are like glasses that we see the world and everything is in focus. When there is inflation, they are never all rising in the same way. Everything is basically out of focus and the world becomes insane for everyone.

This creates a crisis of legitimacy. When the currency produced by the state feels like a lie, the government becomes less trustworthy. Nuclear power is a bellwether for this trust. Unlike a bridge, which people can judge for themselves, nuclear energy is intangible. It requires the public to trust technocratic experts and study results. In the 1940s and 50s, this trust allowed the government to build massive projects. However, when inflation hit in 1973, nuclear costs and timelines exploded globally.

I wonder if nuclear power is a special trust. It is only trust. Because unlike everything else where the government does something, you at least have some feedback mechanism. Normal people can look at it and judge it. With nuclear power, you have to read an enormous amount of stuff and then take study results that other people have done on complete trust.

The erosion of currency legitimacy undermines other state functions. When people lose faith in the basic unit of exchange, they stop giving the government the benefit of the doubt on complex decisions. This is not necessarily a demand for bad policy. Instead, it is a refusal to grant the state the authority needed to execute ambitious goals.

The connection between the hyperinflation of the early 1920s and the rise of the Nazi party is more complex than basic history books often suggest. While the hyperinflation peaked in 1923, the Nazis did not gain significant electoral power until the early 1930s. During the late 1920s, Germany actually experienced a period of relative prosperity and stability fueled by American investment. This changed when the Great Depression hit in 1929 and American money was withdrawn. Chancellor Bruning responded with orthodox, deflationary austerity policies, raising taxes and cutting spending during a period of high unemployment. This era of austerity and the growing fear of communism provided the immediate opening for Hitler to take power.

Mark observes that modern economic historians often focus on these austerity measures as the primary driver for Nazi support. Studies show that regions harder hit by austerity were more likely to vote for the Nazi party. However, this focus might overlook the deeper psychological and social impact of the hyperinflation that occurred a decade earlier. Lionel Robbins famously described Hitler as a child of inflation. This view suggests that the middle class, who had spent decades building savings, were completely wiped out by the economic chaos of 1923. Because most people did not have access to inflation-protected assets, their financial security was destroyed.

The middle class were wiped out. I think that econometrically there is just no way to the evidence being economic historians presenting just does not undercut that thesis. No one was unaffected and they are still wiped out five, eight years later. They cannot rebuild those savings.

While some researchers argue that hyperinflation data does not correlate with Nazi voting patterns at a local level, Mark points out that hyperinflation was so universal that there was little variation to measure. Whether the price level increased by a million percent or a billion percent, the result for the average citizen was the same: their savings went to zero. The lack of regional variation makes it difficult for data models to capture the total destruction of the middle class's stability, which likely left them vulnerable to radical political movements years later.

The hyperinflation era in Germany created a profound loss of faith in the political system. While some scholars question the direct statistical link between inflation and Nazi voting patterns, qualitative evidence suggests that the economic chaos provided a necessary foundation for radicalization. During this period, certain financiers were scapegoated as profiteers. These so-called inflation kings were blamed for getting rich while the rest of the population suffered. Mark notes that areas hit hardest by the economic collapse often showed higher levels of antisemitism, creating a fertile ground for extremist ideologies.

The qualitative evidence and the narrative accounts that this is a precondition. There's nothing deterministic about this. Had Hitler been a less charismatic figure, there are all kinds of counterfactuals in which the Nazis don't win. But it's impossible to think of them absent these preconditions.

The instability of the Weimar Republic meant that the voter base was often willing to shift toward extreme parties. As the classical liberal parties collapsed, radical groups on both the left and right gained traction. By the early 1930s, the government was often ruling through presidential decrees rather than passing acts in the Reichstag. Mark suggests that without a continuous flow of American money, a stable liberal democracy in Germany was highly unlikely. Even without the specific rise of Hitler, the country was trending toward an illiberal or autocratic regime, similar to developments in Austria, Poland, and Italy during the same period.

Milton Friedman suggested that the ideal nominal interest rate is zero. If the interest rate is above zero, people hold less money than they would like. When the rate is zero, holding cash is the same as holding other assets. Achieving this state requires steady deflation. While many associate deflation with the Great Depression, some economists argue that slow deflation can coexist with a strong economy. George Selgin argues that we should allow prices to fall gradually as productivity increases.

The ideal nominal interest rate is zero because you want people to be happy to hold as much money as they otherwise would like. You are not losing any interest by holding cash. It is the same as holding something else. In order to do that, we need to have deflation.

Inflation and deflation create different winners and losers. Inflation helps debtors while deflation helps savers. Unexpected deflation can be destructive, as seen in the 1930s when banks collapsed. Historical periods, like the late 19th century, were sometimes labeled as depressions because prices were falling, even when the economy was not actually in a depression. If price changes are expected, they can be built into wage and price contracts. Modern advancements like AI could lead to broad productivity increases and supply driven deflation. This type of deflation allows for lower prices without the economic damage associated with banking crises.

You should not allow deflations that Milton Friedman would dislike, but you should allow slow declines in prices as productivity goes up.

Since the UK left the gold standard in the 1930s, few policymakers have considered aiming for a declining price level. Inflation targeting usually focuses on a positive rate, but this ignores the fact that productivity growth could allow for lower prices. Ben explains that the relationship between inflation and unemployment is not a fixed law. As soon as policymakers try to exploit this trade off, people adjust their expectations. This is known as the Lucas critique. The benefit of higher inflation vanishes once everyone expects it.

Mark suggests that price level targeting could offer a different path. This approach aims for a stable or slowly rising price level. When a supply shock like the invasion of Ukraine occurs, energy prices spike. Mark argues that central banks should not always tighten policy to fight this imported inflation.

The inflation you import there is not the fault of the Bank of England. It is not caused by bad policy. If you are targeting a low rate of inflation, you are induced to tighten monetary policy to go back to the old price level. But that is actually not what you should be doing.

The public deeply dislikes inflation caused by supply chain issues. Ben proposes a radical idea to manage these shocks. The government could build stockpiles of critical goods. When a supply shock hits, they could ban exports and flood the market to keep the price level flat. This policy might be interventionist and expensive, but it could stop extremist political parties from gaining traction during economic crises.

Supply shocks, such as a sudden rise in energy prices, do not have to result in permanent inflation. From a free market perspective, a monetary authority committed to a stable price level might allow for an initial adjustment but should eventually tighten policy to return to the original trajectory. In this scenario, energy prices would be higher relative to other goods, but the overall price level would remain the same. This requires other prices to decrease to offset the cost of energy.

Inflation can be caused by supply shocks and demand shocks, but ultimately it has to be accommodated by the monetary authority. If the authorities target a stable price level, even if energy prices go up, other prices have to come down relative to those.

Inflation is ultimately a monetary phenomenon. When central banks choose to accommodate a supply shock, they are making a conscious decision to move the economy onto a higher price path than previously intended. Without that monetary expansion, a shock to one part of the economy would simply lead to a shift in relative prices rather than a sustained increase in the cost of living across the board.

In Tudor England, prices increased fivefold over a single century. This period is often called the price revolution. Historians debate whether the primary cause was currency debasement or the massive influx of gold and silver from the Spanish Americas. While some argue the British state remained stable during this time, Mark notes that currency debasement under Henry VIII was actually quite destabilizing and led to several rebellions.

The impact was even more pronounced in the Spanish Empire. When wealth enters a society through a few ships carrying gold and silver, the incentive for rent seeking increases. People want to be part of the bureaucracy or the military to get their hands on the new money first.

The relative value of rent seeking goes up massively in a world where basically all of the wealth of society has been coming in in a few ships. You want to be getting the new gold and silver before it has gone its way into the economy and raised the general prices. You get a relative benefit if you get the coinage earlier.

This dynamic shifts the entire structure of society. By the end of the 17th century, a census in Spain showed that 50% of the adult male population were either soldiers or members of the clergy. This meant half the population was engaged in rent seeking or rent receiving activities rather than productive work.

In the Soviet Union, price stability was the core of government legitimacy. The public was willing to accept poor living standards and limited freedom as long as prices did not rise. When reformers eventually allowed prices to fluctuate, the system collapsed almost immediately. This highlights how deeply a stable cost of living is tied to social order.

One of the features that was necessary for sustaining them was low and stable inflation or no inflation.

The collapse of the Soviet Union also stems from a specific leadership choice. Mark explains that unlike Chinese leaders who used force in Tiananmen Square, Gorbachev was unwilling to order soldiers to shoot citizens. Gorbachev mistakenly believed he could implement economic reform without political change or repression. While the economic crisis might have been unavoidable, a more ruthless leader might have maintained control for much longer.

Societies are naturally conservative and stable because of the endowment effect. Groups with a stake in the current system work hard to prevent change. This allows both good and bad institutions to persist for decades. Even the Nazi regime was obsessed with keeping inflation down because they saw how it destabilized the previous government. Hitler used price and wage controls to maintain a sense of stability, even as the economy remained flawed and fragile.

The difference between survival and revolution often comes down to institutional flexibility. Systems like the British Parliament allow for small shifts that can lead to massive policy changes. This acts as a pressure valve for the country. In contrast, rigid systems often choose to entrench privileges rather than make moderate reforms. Ben notes that this lack of flexibility makes them vulnerable to total collapse when instability hits.

If you have really flexible institutions, then you don't have to have a revolution to get change. That's the great thing about having especially the British English parliament style system where you can get a fairly small shift, complete change and massive power in principle to achieve that change.

In the past, flexible institutions allowed societies to adapt to change without the need for revolution. In 1690s Parliament, this flexibility helped build roads and manage land. However, this adaptability has diminished over the last forty years. While some believe autocracies are more flexible because a single leader can change policies, they often lack the legitimacy needed to implement real reform. Historical examples like the Russian Czar or the Shah of Iran show that these regimes often struggle to change bad policies or touch certain assets without sparking unrest.

The ability of a state to function depends heavily on its perceived legitimacy. In 1950s Britain, the public accepted the government's power to purchase land for the common good. People believed that a personal loss today would be balanced by a general benefit tomorrow. Today, that trust has eroded. Modern governments often act as if they still possess high levels of political legitimacy, but the public no longer trusts them to act in the general interest.

The UK government in particular wants to act like it is a super high trust, super high legitimacy government, when in fact it is medium high. In the 1950s and 1960s, basically everyone accepted that the government could compulsorily purchase land. Now it is just obvious that people will not tolerate that.

To solve this, governments could adopt different models like the land readjustment systems used in Japan. This method requires a majority of landowners to agree and share in the benefits, making it more resilient in low trust environments. Another potential solution is earmarking tax revenue for specific priorities. When the public knows their money goes toward a specific project rather than a general budget, they are more likely to support investment. Ben suggests that the current lack of transparency in how taxes are spent contributes directly to public distrust.

Economic growth also serves as a vital lubricant for institutional friction. Mark notes that during periods of rapid growth, people are more likely to tolerate temporary setbacks or even corruption. They trust that the future will bring enough prosperity to compensate for current losses. Without growth, every government action is viewed with suspicion and every loss feels permanent.

The state makes a fundamental promise to the public that it will maintain the value of money. This nominal anchor functions as a covenant between the sovereign and the people. When the government allows inflation to spiral, it violates this basic trust. Historically, the two primary responsibilities of a state are defending its citizens from foreign invasion and providing usable money. If a state fails at defense, society often collapses or turns to political extremism.

The Weimar inflation is because they lose the war. Had Britain and France lost World War I, the French could have gone fascist. There is no reason why Germans are uniquely prone to Nazism. The conditions were there for political violence across Europe.

Societies respond to inflation differently based on their historical experiences. Mark notes that in the United States and Germany, a vast majority of the population views high inflation as a precursor to political instability and violence. In contrast, countries like Brazil, which have historically lived with high inflation, show much lower levels of concern regarding its link to societal collapse. Modern Western societies tend to have a high tolerance for price increases because of a general trust in the underlying system. When people trust that individual price hikes are not an indication of total economic failure, they are more willing to accept them.

High inflation makes a stable functioning society almost impossible. Brazil serves as a primary example of this struggle. In the 1960s, many viewed Brazil as a future leader across various fields. Instead, the country has significantly underperformed due to political instability and high inflation. When political power shifts in Brazil, the losing party often faces persecution from the winners. This creates a cycle of dysfunction.

You can't have a stable functioning society with high inflation. And Brazil supports that. I think you've got to look at what's the overall picture. Brazil's had high inflation, it's had political instability. When one party loses, they persecute the other party.

Inflation does not lead to revolution in a simple one-to-one relationship. While it is a necessary condition for societal breakdown, it is not always a sufficient one. Some nations manage to elect leaders who are committed to solving the problem, like Reagan in the United States or Thatcher in the United Kingdom. In other cases, a country might simply muddle through the dysfunction without reaching a full revolution. This state of persistent dysfunction is still a negative outcome for the population.

It's not one to one monocausal inflation revolution because you could elect a leader democratically who's committed to solving this problem. The dysfunction stops short of revolution. So you just have dysfunction and people muddle through. But it's still not good.