Capital in the Twenty-First Century (19 page)

Relative price movements can play an even more decisive role in Ricardo’s theory based
on the principle of scarcity: if certain prices, such as those for land, buildings,
or gasoline, rise to very high levels for a prolonged period of time, this can permanently
alter the distribution of wealth in favor of those who happen to be the initial owners
of those scarce resources.

In addition to the question of relative prices, I will show that inflation per se—that
is, a generalized increase of all prices—can also play a fundamental role in the dynamics
of the wealth distribution. Indeed, it was essentially inflation that allowed the
wealthy countries to get rid of the public debt they owed at the end of World War
II. Inflation also led to various redistributions among social groups over the course
of the twentieth century, often in a chaotic, uncontrolled manner. Conversely, the
wealth-based society that flourished in the eighteenth and nineteenth centuries was
inextricably linked to the very stable monetary conditions that persisted over this
very long period.

To back up a bit: the first crucial fact to bear in mind is that inflation is largely
a twentieth-century phenomenon. Before that, up to World War I, inflation was zero
or close to it. Prices sometimes rose or fell sharply for a period of several years
or even decades, but these price movements generally balanced out in the end. This
was the case in all countries for which we possess long-run price series.

More precisely, if we look at average price increases over the periods 1700–1820 and
1820–1913, we find that inflation was insignificant in France, Britain, the United
States, and Germany: at most 0.2–0.3 percent per year. We even find periods of slightly
negative price movements: for example, Britain and the United States in the nineteenth
century (
−
0.2 percent per year if we average the two cases between 1820 and 1913).

To be sure, there were a few exceptions to the general rule of monetary stability,
but each of them was short-lived, and the return to normal came quickly, as though
it were inevitable. One particularly emblematic case was that of the French Revolution.
Late in 1789, the revolutionary government issued its famous assignats
,
which became a true circulating currency and medium of exchange by 1790 or 1791.
It was one of the first historical examples of paper money. This gave rise to high
inflation (measured in assignats) until 1794 or 1795. The important point, however,
is that the return to metal coinage, after creation of the franc germinal, took place
at the same parity as the currency of the Ancien Régime. The law of 18 germinal, Year
III (April 7, 1795), did away with the old livre tournois (which reminded people too
much of the monarchy) and replaced it with the franc
,
which became the country’s new official monetary unit. It had the same metal content
as its predecessor. A 1-franc coin was supposed to contain exactly 4.5 grams of fine
silver (as the livre tournois had done since 1726). This was confirmed by the law
of 1796 and again by the law of 1803, which permanently established bimetallism in
France (based on gold and silver).
²⁷

Ultimately, prices measured in francs in the period 1800–1810 were roughly the same
as prices expressed in livres tournois in the period 1770–1780, so that the change
of monetary unit during the Revolution did not alter the purchasing power of money
in any way. The novelists of the early nineteenth century, starting with Balzac, moved
constantly from one unit to another when characterizing income and wealth: for contemporary
readers, the franc germinal (or “franc-or”) and livre tournois were one and the same.
For Père Goriot, “a thousand two hundred livres” of rent was perfectly equivalent
to “twelve hundred francs,” and no further specification was needed.

The gold value of the franc set in 1803 was not officially changed until June 25,
1928, when a new monetary law was adopted. In fact, the Banque de France had been
relieved of the obligation to exchange its notes for gold or silver since August 1914,
so that the “franc-or” had already become a “paper franc” and remained such until
the monetary stabilization of 1926–1928. Nevertheless, the same parity with metal
remained in effect from 1726 to 1914—a not insignificant period of time.

We find the same degree of monetary stability in the British pound sterling. Despite
slight adjustments, the conversion rate between French and British currencies remained
quite stable for two centuries: the pound sterling continued to be worth 20–25 livres
tournois or francs germinal from the eighteenth century until 1914.
²⁸
For British novelists of the time, the pound sterling and its strange offspring,
such as shillings and guineas, seemed as solid as marble, just as the livre tournois
and franc-or did to French novelists.
²⁹
Each of these units seemed to measure quantities that did not vary with time, thus
laying down markers that bestowed an aura of eternity on monetary magnitudes and a
kind of permanence to social distinctions.

The same was true in other countries: the only major changes concerned the definition
of new units of currency or the creation of new currencies, such as the US dollar
in 1775 and the gold mark in 1873. But once the parities with metal were set, nothing
changed: in the nineteenth and early twentieth centuries, everyone knew that a pound
sterling was worth about 5 dollars, 20 marks, and 25 francs. The value of money had
not changed for decades, and no one saw any reason to think it would be different
in the future.

In eighteenth- and nineteenth-century novels, money was everywhere, not only as an
abstract force but above all as a palpable, concrete magnitude. Writers frequently
described the income and wealth of their characters in francs or pounds, not to overwhelm
us with numbers but because these quantities established a character’s social status
in the mind of the reader. Everyone knew what standard of living these numbers represented.

These monetary markers were stable, moreover, because growth was relatively slow,
so that the amounts in question changed only very gradually, over many decades. In
the eighteenth century, per capita income grew very slowly. In Great Britain, the
average income was on the order of 30 pounds a year in the early 1800s, when Jane
Austen wrote her novels.
³⁰
The same average income could have been observed in 1720 or 1770. Hence these were
very stable reference points, with which Austen had grown up. She knew that to live
comfortably and elegantly, secure proper transportation and clothing, eat well, and
find amusement and a necessary minimum of domestic servants, one needed—by her lights—at
least twenty to thirty times that much. The characters in her novels consider themselves
free from need only if they dispose of incomes of 500 to 1,000 pounds a year.

I will have a lot more to say about the structure of inequality and standards of living
that underlies these realities and perceptions, and in particular about the distribution
of wealth and income that flowed from them. At this stage, the important point is
that absent inflation and in view of very low growth, these sums reflect very concrete
and stable realities. Indeed, a half century later, in the 1850s, the average income
was barely 40–50 pounds a year. Readers probably found the amounts mentioned by Jane
Austen somewhat too small to live comfortably but were not totally confused by them.
By the turn of the twentieth century, the average income in Great Britain had risen
to 80–90 pounds a year. The increase was noticeable, but annual incomes of 1,000 pounds
or more—the kind that Austen talked about—still marked a significant divide.

We find the same stability of monetary references in the French novel. In France,
the average income was roughly 400–500 francs per year in the period 1810–1820, in
which Balzac set
Père Goriot.
Expressed in livres tournois, the average income was just slightly lower in the Ancien
Régime. Balzac, like Austen, described a world in which it took twenty to thirty times
that much to live decently: with an income of less than 10–20,000 francs, a Balzacian
hero would feel that he lived in misery. Again, these orders of magnitude would change
only very gradually over the course of the nineteenth century and into the Belle Époque:
they would long seem familiar to readers.
³¹
These amounts allowed the writer to economically set the scene, hint at a way of
life, evoke rivalries, and, in a word, describe a civilization.

One could easily multiply examples by drawing on American, German, and Italian novels,
as well as on the literature of all the other countries that experienced this long
period of monetary stability. Until World War I, money had meaning, and novelists
did not fail to exploit it, explore it, and turn it into a literary subject.

This world collapsed for good with World War I. To pay for this war of extraordinary
violence and intensity, to pay for soldiers and for the ever more costly and sophisticated
weapons they used, governments went deeply into debt. As early as August 1914, the
principal belligerents ended the convertibility of their currency into gold. After
the war, all countries resorted to one degree or another to the printing press to
deal with their enormous public debts. Attempts to reintroduce the gold standard in
the 1920s did not survive the crisis of the 1930s: Britain abandoned the gold standard
in 1931, the United States in 1933, France in 1936. The post–World War II gold standard
would prove to be barely more robust: established in 1946, it ended in 1971 when the
dollar ceased to be convertible into gold.

Between 1913 and 1950, inflation in France exceeded 13 percent per year (so that prices
rose by a factor of 100), and inflation in Germany was 17 percent per year (so that
prices rose by a factor of more than 300). In Britain and the United States, which
suffered less damage and less political destabilization from the two wars, the rate
of inflation was significantly lower: barely 3 percent per year in the period 1913–1950.
Yet this still means that prices were multiplied by three, following two centuries
in which prices had barely moved at all.

In all countries the shocks of the period 1914–1945 disrupted the monetary certitudes
of the prewar world, not least because the inflationary process unleashed by war has
never really ended.

We see this very clearly in
Figure 2.6
, which shows the evolution of inflation by subperiod for four countries in the period
1700–2012. Note that inflation ranged between 2 and 6 percent per year on average
from 1950 to 1970, before rising sharply in the 1970s to the point where average inflation
reached 10 percent in Britain and 8 percent in France in the period 1970–1990, despite
the beginnings of significant disinflation nearly everywhere after 1980. If we compare
this behavior of inflation with that of the previous decades, it is tempting to think
that the period 1990–2012, with average inflation of around 2 percent in the four
countries (a little less in Germany and France, a little more in Britain and the United
States), signified a return to the zero inflation of the pre–World War I years.

To make this inference, however, one would have to forget that inflation of 2 percent
per year is quite different from zero inflation. If we add annual inflation of 2 percent
to real growth of 1–2 percent, then all of our key amounts—output, income, wages—must
be increasing 3–4 percent a year, so that after ten or twenty years, the sums we are
dealing with will bear no relation to present quantities. Who remembers the prevailing
wages of the late 1980s or early 1990s? Furthermore, it is perfectly possible that
this inflation of 2 percent per year will rise somewhat in the coming years, in view
of the changes in monetary policy that have taken place since 2007–2008, especially
in Britain and the United States. The monetary regime today differs significantly
from the monetary regime in force a century ago. It is also interesting to note that
Germany and France, the two countries that resorted most to inflation in the twentieth
century, and more specifically between 1913 and 1950, today seem to be the most hesitant
when it comes to using inflationary policy. What is more, they built a monetary zone,
the Eurozone, that is based almost entirely on the principle of combating inflation.

FIGURE 2.6.
   Inflation since the Industrial Revolution

Inflation in the rich countries was zero in the eighteenth and nineteenth centuries,
high in the twentieth century, and roughly 2 percent a year since 1990.

Sources and series: see
piketty.pse.ens.fr/capital21c
.