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A Brief History of Inflation

At The Spaventa Group, we believe that good investments can be found in all macroeconomic conditions. New technologies are always being developed, tested, and brought to market—and the companies that champion them will require bold investors to back them, regardless of where inflation or interest rates are headed. We’re excited to partner with you to invest in some of the world’s most cutting-edge companies.

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In the early morning of April 19th, 1775, a small group of American colonial militiamen encountered a group of 500 British soldiers led by Major John Pitcairn outside the town of Lexington, Massetchusetts. The two sides exchanged gunfire, resulting in one wounded British regular and the deaths of eight American volunteers.

Later that day, about 400 American soldiers under the command of Colonel James Barrett opened fire on British forces seven miles away near the North Bridge in Concord—an event immortalized by Ralph Waldo Emerson as “the shot heard ‘round the world” for its significance as the opening shot of the American Revolutionary War.

By the war’s end nearly eight and a half years later, both sides had suffered significant casualties. Roughly 25,000 American soldiers—or between 1% of the population at the time—perished as a direct result of the war, while Great Britain and her allies lost more than 23,000 men.

Inflation During the American Revolutionary War

The war was also bad news for the colonies’ economy. To fund its military efforts, the Continental Congress—the legislative body established during the war—started issuing paper currency in May 1775.

Called the “continental”, these early dollars quickly became worthless. The destruction of cropland and physical capital stock during the war as well as the introduction of counterfeit dollars into the money supply by the British meant that a deluge of continental dollars were soon chasing a dwindling number of goods and services.

By the end of 1777—a mere year and a half since the continental dollar was first issued—it had lost over 80% of its value. In the following year, inflation hit 29.8%.

These rapidly escalating prices were accompanied by widespread food shortages, a double whammy that spawned food riots initiated by hungry crowds who “objected to ‘exorbitant’ prices that shopkeepers demanded for their goods or to merchants’ practice of withholding commodities from the market altogether”.

These disruptions plagued cities across the thirteen colonies and especially scarred the civic life of Philadelphia and Boston—then the first- and third-largest cities in the colonies. Both cities suffered “deep, sustained conflict”, and would be plagued by unrest and discontent until the conclusion of the war.

Inflation in the U.S. From 1783 Through the Civil War

However, the end of the war wasn’t a panacea for the newly-independent country’s deep-seated economic woes. The cost of independence was high: the country spent $151 million on the Revolutionary War, or over $3.3 billion in 2023 dollars.

While a fairly trivial sum for the country of today to bear, the economy of the United States in 1783 was a fraction of the size it is today. To make matters worse, the war had created an economic depression. Between 1774 and 1789, the country’s GDP (Gross Domestic Product) per capita declined by 30% from peak to trough, leaving the struggling nation with few tools to pay down its wartime debt other than to print more money.

Predictably, further inflation ensued—though the impact of the ballooning money supply was tempered this time by the explosion in economic activity. Between 1772 and 1804, the volume of American cotton exports grew twelvefold, thanks in large part to the invention of the cotton gin in 1794.

These facts meant that inflation in the U.S. averaged a modest 2% from 1790 until the end of the War of 1812 (which did not occur until 1815).

Later, in the antebellum period of the early 19th century, the U.S. economy entered a period of deflation. Rising economic output due to rapid industrialization and mechanization—along with the proliferation of megaprojects like canals and interstate railroads—helped lower prices across the country.

Between 1820 and 1860, U.S. GDP per capita doubled, while prices declined by an average of 1% per year. This marked the longest period of deflation in U.S. economic history—rivaled only by the 34-year period between 1865 and 1899.

However, the American Civil War, like the Revolutionary War preceding it, was deleterious for the U.S. economy as a whole—and especially so for the South.

Prices inflated by roughly 17% within the country as a whole between 1861 and 1865. In other words, prices doubled within those four years.

Meanwhile, the South’s economy was essentially destroyed, rendering the Confederate States dollar practically worthless by the end of the war.

The human cost of the war was equally staggering. More Union and Confederate combatants died in the Civil War than in any other armed conflict in American history. (In fact, the Civil War’s 655,000 death toll exceeds the American death tolls in World War I and World War II combined!)

Inflation: 1865 to 1945

Following the war, the country entered the Reconstruction era. States that joined the now-defeated Confederacy were readmitted to the Union, and the South’s economy was rebuilt.

This, in addition to the U.S.’ adoption of the gold standard in the late 19th century, limited the growth of the money supply and caused prices to decline until the turn of the century.

Inflation picked up again in the early 20th century, averaging about 2% in the first decade of the 1900s and soaring to double-digit heights during World War I.


Strict rations, higher taxes, labor shortages (due to a lack of working-age men who were available to staff civilian roles), and a reallocation of labor and capital towards the production of wartime goods meant higher prices for all.

Pent-up consumer demand following the end of wartime rationing further exacerbated inflationary pressures, and by 1918, annual inflation stood at 17.3%.

However, the Depression of 1920–1921—and later the Great Depression—caused prices to sharply deflate once again. As a result, prices on the eve of World War II in 1941 were essentially equivalent to those at the conclusion of World War I in 1918, 23 years earlier.

In summary, prices were very volatile prior to the end of World War II. Periods of high inflation were followed by periods of severe deflation, resulting in significant short-term price swings but no long-term trend. Put differently, if one ignores the volatility experienced in between the Revolutionary War and World War II, prices remained essentially unchanged for roughly 170 years.

Inflation Since World War II

The postwar era lies in stark contrast to the behavior of price changes before World War II. Most notably, deflationary periods of any duration have almost completely disappeared from the picture.

In the 78 years since the end of World War II, the CPI (Consumer Price Index), the most-commonly used inflation gauge, has declined in only three years: 1949, 1955, and 2009.

Prices have increased in each of the remaining 75 years, usually by single-digit percentages and occasionally at double-digit rates.

For instance, the half-decade following the end of World War II was marked by high prices for much the same reason inflation occurred following the end of World War I.

However, increases in the price level remained modest in the following two decades, averaging just 2.4% per year between 1950 and 1970.

Unfortunately, the 1970s saw much higher inflation. Sustained deficits spending, a rise in global oil prices, low interest rates, and the Vietnam War caused inflation to clock in at 7.8% per year throughout the decade, meaning that the prices at the end of 1980 had more than doubled against those recorded at the beginning of 1970.

Thanks to aggressive monetary tightening by the Federal Reserve (and the subsequent recession that these actions caused), inflation began to cool in the 1980s, averaging 4.7% annually during that decade.

Better yet, lessons learned from the ‘70s and earlier allowed the Fed to develop a playbook that would lead to a period of prolonged macroeconomic tranquility. Termed the Great Moderation, this period of time lasted between the mid-‘80s until 2007, and was defined by low-but-positive rates of inflation coupled with sustained GDP growth and mild recessions.

Despite the severity of the Global Financial Crisis, which occurred between 2007 and 2009, the decade following the crisis has arguably been similarly calm. Between 2010 and 2020, prices rose at an annual rate of just 1.7%.

However, in the past two years, inflation has picked up again, largely due to supply shocks as a result of the COVID-19 pandemic as well as a release in pent-up consumer demand following the relaxation of global travel restrictions and quarantine guidelines. Specifically, the CPI rose by 4.7% in 2021 and 8.0% in 2022—marking a 40-year high.

Despite these worrying signs, the U.S. economy is unlikely to experience another episode of prolonged inflation. The International Monetary Fund expects inflation to average 3.5% in 2023, while the Federal Reserve predicts that inflation will notch just 2.4% per year between 2023 and 2032—a welcome forecast for American consumers and businesses alike.

Partnering With You Through All Seasons

At The Spaventa Group, we believe that good investments can be found in all macroeconomic conditions. New technologies are always being developed, tested, and brought to market—and the companies that champion them will require bold investors to back them, regardless of where inflation or interest rates are headed.

We’re excited to partner with you to invest in some of the world’s most cutting-edge companies. Through our series of curated alternative funds, you’ll gain exposure to vc-backed private companies.