2.1 The era before the First World War

A Finnish translation in 1904 of Principes d'economie politique (1882) by Professor Charles Gide was the first time that an economics textbook in Finland dealt in more detail with changes in the value of money. The textbook describes the development of the value of money from the days of Charlemagne around 850 AD through to the 1890s. From the late nineteenth century to the First World War, prices increased only moderately, and economists showed scant interest in changes in the value of money. Indeed neither the concept of "index" nor that of "inflation" were yet in widespread use.

The following graph plots the development of inflation in Europe from 850 to1890, 850=100

For a long time the development of the value of money was largely dependent on the demand for and supply of corn. In 1375-1500, deflation saw the value of money rising and prices coming down; this was mainly due to the Black Death that ravaged Europe. The upsurge in prices and the declining value of money in 1500-1600 was due, at least in part, to the discovery of America and the precious metals that were brought back to Europe from the new continent. Deflation in 1600-1750 was due to constant warfare in Europe. In the mid-eighteenth century, with the invention of the Spinning Jenny and the ensuing Industrial Revolution and economic growth, the value of money started on a steady track of decline. The era of inflation had dawned.