[jhendon5]

Tom (or anyone else with an answer!)

At about 31 minutes of the video lecture titled The Great Depression, you say that the inflation of the 1920s is missed by many economists because it is hidden by the fact that consumer prices stayed the same, which is deceptive because, due to increased productivity of that era, prices should really have gone down.

So the price inflation that is hidden is the difference between what the lower prices should have been due to increased productivity and the unchanging higher prices that actually existed.

But I have often seen price inflation explained as the Fed increasing the supply of money, resulting in consumers having more purchasing power, i.e. more money chasing fewer goods, bidding the price of goods up, as you illustrate with the example of art prices being bid up should each of us get an extra million dollars.

If productivity increased during the 1920s we don’t have more money chasing fewer goods, we have more money chasing more goods, and it occurs to me that price stability might logically result.

The only way I can arrive at your conclusion is if there is something that links productivity and consumer prices in such a way that a certain increase in productivity should necessarily result in a certain decrease in prices.

Is there such a link? Or am I missing something?

[jhendon5]

I guess I had to go through the process of creating this question before I could see that this is exactly what Tom is saying in the lecture: that if it weren’t for inflation of the money supply by the Fed, prices would have gone down. But the decrease in prices that would have been anticipated from the increases in productivity was offset when the Fed inflated the money supply, thus resulting in prices remaining the same.

To quote Gilda Radner “NEVER MIND!”

[woods]

Right, that’s it exactly. The inflation of the money supply pushes prices up, and the increased abundance pushes them down. Hence it’s a wash, roughly.

[Author]

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