I have a fictional country which I'm currently mapping. My country's currency is the Lobe, an acronym for 'Loaf Of Bread Equivalent'. The government guarantees that 1 Lobe will always buy 1 loaf of 'government specification' bread. What I'm asking, is it feasible that a loaf of bread costs 1 lobe in 1860, as well as in 2017? Secondly, how would this 'price fixing' affect all other aspects of life?
Is it possible to have an economy with no inflation? Yes. But the government fixing the price of one item will not do this.
Suppose the government passes this law: One loaf of bread must cost one lobe, period.
So what happens if there's a poor harvest and bakers can't produce as much bread as people want at 1 lobe per loaf? In a free market, if people want to buy 10,000 loaves but only 5,000 loaves are available, then the price goes up. This leads some people to decide to buy less bread or not buy any bread, perhaps buying rice or potatoes instead. It also encourages farmers and bakers to produce more bread to take advantage of the higher price. Eventually the price stabilizes at an amount where the quantity demanded equals the quantity available.
If the government prevents that from happening, then there will be shortages. Maybe people have to wait on long lines to get bread, and the people at the end of the line are out of luck. Or you have to have the right connections to get bread: people who are friends with the baker get bread, or people who have political power. Or you get a black market: bakers start secretly selling most of their bread at a more realistic, market price.
And what about the prices of all the other products out there? If those prices are allowed to fluctuate freely with the market, then okay, there is no inflation in the price of bread, but there could be inflation in the price of everything else. You could, of course, have government-set prices for everything. But then you just propagate the problem I discussed above: massive shortages in under-priced products. And who sets all these prices, and how? Who decides how much a pound of potatoes should cost compared to a loaf of bread? And if anything happens to change the relative value of two products, like new technology or a new source of imports or even just changes in taste, like people decide to eat more rice and less bread, now your prices are out of sync with true value, and there's more economic disruption.
The real way to eliminate inflation is to control the money supply. The US started doing this fairly successfully back in the 1980s.
To take an oversimplified example: Suppose the only thing there was to buy was bread, and there are 10 loaves available. If people have 10 lobes available to spend, then the price will stabilize at 1 lobe per loaf. If people have 20 lobes to spend, then the price will go up to 2 lobes per load. Etc. This is oversimplified in many ways: Assuming there is only one product to buy, assuming that each unit of money will be used for exactly one purchase, etc. But it's the general idea.
Basically, when the US treasury sees prices increasing faster than the target range, they reduce the money supply. When they see increasing too slowly or falling, they increase the money supply. Or more often, they adjust the rate at which the money supply is increasing: it's pretty much always increasing, just faster or slower. Since that policy was adopted inflation in the US has mostly been kept to around 2% per year. They're not all-knowing or all-powerful so they can't manage it perfectly, but they're doing fairly well.
In short: It could be implemented but it makes no sense
In 1860 bread was significantly worse than today
- flour was with sand and dust because of grains from millstones
- new generations of yeast were developed
- even water is better today
It's only about ingredients. Add changes in the process and salary and you will see that contemporary bread will have a different price. I'm not sure who will buy bread made by outdated standards. (Without marketing bulls**t like old-fashioned meal for 100 gold! Only today!!)
The goverment will want to keep its bread specification as modern as possible. The key is as possible. Definitely standard loaf differs from top-price bread - it will cost too much for the goverment instead. In our world, the commodity bundle is used to define the standard of living. There are numerous indicators and issues with the definition of what people need as a minimum wage. In some countries the minimum wage is less than the living wage. This reduces goverment expenses for social aspects - significantly.
In your case the goverment could play with the standard to keep the price for bread exactly at 1 lobe. But this 'goverment loaf' would be far away from reality.
Normally prices change. How good was the last harvest? What are the current internal politics and how is the international market doing? - all of these affect the price. To avoid fluctuations the goverment should buy anything and then sell all goods with a fixed price. That's how the USSR government did it. It also fixed the salary and banned international trading. With loose rephrasing you cannot have free capital moving, fixed prices and your own currency at the same moment.
Without inflation it becomes viable to hoard currency. With inflation hoarded currency slowly loses value (around 50% per decade) so to maintain wealth, the currency must be made to work. Currency hoarded is currency effectively lost to the system, to maintain a fixed price system you must match your currency supply to the economy.
People hoarding wealth remove so much money from the economy that the system grinds to a halt, 1 loaf costs 1 lobe, but there aren't any lobes. 1 loaf now costs 4 eggs, or 6 carrots or what have you got my children are starving.
You print replacement currency because people are hoarding, those hoards are then dropped into the market causing an inflation spike, 1 loaf costs 1 lobe, 1 egg costs 10,000 lobes and people are taking their pay home in wheelbarrows and it still won't buy enough flour to make 1 loaf regardless of what the loaf costs.
Fixed price systems are very dangerous, Venezuela is a current example of how badly it can go wrong. The government is trying to control the street price of retail items without controlling the full supply chain and price at every step.
The national debt
We seem to have overlooked this one between us. Governments don't often pay off debts, they only service them in perpetuity and let inflation devalue them to the point where they're irrelevant while always borrowing more. Switching to a system without inflation ties the government to an economic model in which they actually have to pay their debts. All they need to do under an inflation based system is borrow at an interest rate lower than the rate of inflation.
Governments like to keep the value of their currency low relative to other currencies. This keeps domestically generated produce cheaper relative to imported products and helps with exports. The rate of inflation is partially a side effect of this constant effort to keep the currency value down.
Of course it doesn't do to make imported produce too expensive so it doesn't work out as an all out race to the bottom, but there's a constant game being played to keep the balance and keep your currency "weak". Some governments like to fix their exchange rates (China, Venezuela (again)) others resort to euphemisms like "quantitative easing" a.k.a. currency devaluation.
Not joining in with this game in a globalised market risks leaving you with a high value currency and struggling to export goods onto the global market, while imported bread undercuts your locally produced fixed price bread, leaving a net flow of money out of the country and again you're struggling to control currency supply and prices.
Yes, you can, with demurrage:
Unlike inflation, demurrage gradually reduces only the value of currency held: it is in effect a negative interest (a tax) on currency in circulation versus inflation that also reduces the value of savings or retirement funds.
Demurrage may encourage consumption, because if you don't spend money it wil lose value. In a system with demurrage, the total money supply can be held fixed so there is no need for inflation. In reality, banks considered demurrage but chose inflation instead:
The major central banks' post-World War II policy of steady monetary inflation as proposed by Keynes was influenced by Gesell's idea of demurrage on currency, but used inflation of the money supply rather than fees to increase the velocity of money in an attempt to expand the economy.
Of course, you should design the currency such that it loses value regardless of whether it it held under a mattress or on the bank. There are different ways of implemented such a solution. The Wörgl Freigeld currency required monthly stamps:
The name results from the idea that there is no incentive to store or hoard Freigeld as it will automatically lose its value after some time. It is claimed that as a result, interest rates could decrease to zero.
There are good reasons that inflation may be preferred over demurrage; see the Wikipedia article. But that doesn't mean demurrage is impossible; it will just have certain side-effects. People might start using unofficial currencies that do not lose value, for example; when loss of value is discontinuous, vendors may not wish to accept money just before the loss of value is due (but perhaps this can be mitigated with modern technology). Probably many effects I have not thought of.
The reason we use gold is because it stays about the same value, you can't just pump out a load more gold...but you can with bread.
Think about it in terms of 1 lobe actually being a loaf of bread, you have to have as many lobes as loaves of bread (otherwise someone would have to sell their bread at two for a lobe or they wouldn't be able to sell the second one). Bakers are essentially printing money.
It would be like the German hyperinflation, you wouldn't be stopping inflation at all.
Economics is a very very wide field and it is difficult (if not impossible) to answer this question with any certainty. There is a quote that sums it up well:
So with that in mind, my answer is that yes, you can get a non-inflationary society, given certain conditions.
Inflation is dictated to a large degree by the supply of money. If the government increases the supply of money (ie by printing more of it), then the result is inflation.
So you can control inflation by tightly controlling the money supply. It is as simple as that.
Except that it isn't simple to do that. Governments have many reasons other than inflation for adjusting the money supply, and controlling it tightly for inflation purposes will make it harder to manage other aspects of the economy.
Also, you're linking the currency to the value of a loaf of bread. Unfortunately, the value of bread is not fixed, which means it's going to be tough to fix the price.
What happens in your world when there is a drought and a shortage of wheat. No wheat; no flour; no bread. The farmers need to maintain their income, so they have to charge more for what wheat the do produce, so bakers would be paying much more than usual for the ingredients to make the bread. How can their prices stay the same? You'd have to price control the whole supply chain, but if you do that where there are shortages, you'll develop a black market very quickly.
Or what happens if a baker works out that he can make bread more cheaply by adding chalk dust to the flour? Now he's selling what is effectively a fake and poor quality product for the same standard price and making loads of extra money out of it. Or if another baker automates his factory and halves his production costs? Or if a baker of luxury bread (which should cost more than a standard loaf but would be harder to price control) uses automation to get his prices down to the same or lower than a standard loaf?
And what about if another kind of staple food (potatoes?) is introduced to the country, becomes popular and undermines the market for bread? Especially if it is cheaper than bread and/or more nutritious.
Any of these things, or a million others, could totally undermine the price controls on bread, and if that's the foundation of your economy, then undermining the price of bread will undermine the whole economy.
Let's list main pitfalls:
1) In case of using precious metals using any fixed exchange is guaranteed long term failure (as tried by countries in XIX who tried to keep both golden and silver coins with for simplicity reasons a fixed exchange rate).
2) (the problem of bad harvest was already discussed but in early times it was a very serious issue for economy)
3) Next thing - early fiat currencies, were usually prone to inflation because of political pressure. It took a while for govs to learn how to safeguard central bank (nowadays usually through constitutional means, but some countries (like the USA) still use more archaic form like gov branch with features of private company) from political mending.
4) So except from that it more or less can be done... Just there is one problem... Bread based currency would nowadays would be subject to moderate price swings and moderate inflation. Yeah... Inflation is measured through basket of goods and services. And here you fixed just one. Because of tech progress price of bread (or generally agriculture products) tend to go down in comparison to price of ex. medical services, rent or childcare. So the price of bread would be fixed, but if one measured prices through CPI, would presumably get at least comparable inflation to the contemporary one in civilized countries.
But actually, I'm not saying that it couldn't be done if there was huge amount of political will. Just the gains in comparison to efforts would be underwhelming.
There'd still be inflation/deflation
Fixing the value of money to a commodity doesn't eliminate inflation. It only eliminates inflation relative to that commodity. So one loaf of bread costs one lobe. But your Blu-Ray player may change from fifty lobes to either forty or sixty.
The change of prices of everything else relative to loaves of bread is either inflation or deflation.
This is also somewhat problematic because if they print too many Lobes, bakers won't be able to afford the ingredients for bread. But if people make the ingredients for bread cheaper by improved growing methods or whatever, they can print more Lobes causing inflation in everything else.
More commonly though would be deflation. Because loaves of bread are relatively stable and not getting improved much. So there is a restricted supply of currency but ever more options on which to spend it.
Overall there may be less inflation/deflation under such a system, but there will still be some.
Different from gold
One of the problems with gold was that finding a new gold source would cause inflation. Then when a source tapped out, there would be deflation. This is because gold was the actual money and currency was just a paper alternative. However in this system, you wouldn't just be able to hand someone fifty loaves of bread for a Blu-Ray player. If bakers make too much bread, it will just rot on the shelves.
Central banking would spend a lot of time watching prices relative to bread. They also might spend time working on productivity improvements for bread. Cheaper bread allows more Lobe printing and helps to prevent deflation. Deflation is bad because it causes employment losses (or more precisely having insufficient currency to cover all expenses causes both deflation and employment losses).
Commodity money used to work because most people farmed. Even if they were unable to trade, they could still eat their own food. So a decade or two of deflation was survivable. In this system, the employment losses from deflation lead to more taxes which causes more deflation (increases the cost of bread). Hyperdeflation would be a potential problem.
Exempting bread production from taxes might help with that, although the inputs are still a problem. You could also exempt wheat, water, sugar, and yeast, but fuel and vehicles to transport them would be more difficult. Similar problems with the energy using in milling and baking, etc.
The government could try to go on a bread standard similarly to how it could go on a gold standard, but there would be serious complications. The case to abandon the system in a crisis would be compelling. There are worse things than rising prices. Falling prices is one of them!
Could you do this with loaves of bread? We can get around the problem that loaves of bread isn’t a standardized commodity if we make it an amount of grain or flour, and it doesn’t really matter for the purposes of this discussion if the quality of flour changes over time; the government just wants to ensure that one unit of currency buys the same amount of flour. (Maybe this evolved from the historically very common arrangement that farmers must pay their taxes in grain or flour, the unit of measure happened to be enough to bake a loaf of bread, and the government wanted to convert from in-kind to cash payment of taxes while promising that the rate would not change. But it’s your story.)
Let’s briefly review how countries maintain the “value” of their currencies in the real world. Today, all countries that do this keep a fixed exchange rate of their currency and the currency of a major trading partner. In the past, countries often did this with either gold or silver.
The price of a currency, like the price of anything else, is determined by supply and demand. Try to outlaw that, and you get a black market. So how do countries maintain a fixed currency peg, or in other words, a fixed price for one commodity? They promise to buy their own currency back at the official exchange rate. Then, they have to own a big enough stockpile of whatever they promised to buy it back with to make that credible. If one dollar is worth 100 yen, then one yen is worth 1/100 of a dollar, and the way the Federal Reserve would keep the price of a yen from going above that is by promising to buy as many dollars as anyone wants to sell for 100 yen each. They could keep the price of yen from going below that by printing more dollars and buying yen. Or the Bank of Japan and the Federal Reserve might reach an agreement on what the exchange rate should be and cooperate. (But observe that neither the U.S. nor Japan actually do that. They let the prices of their currencies fluctuate.) Some places, like Hong Kong, only issue new currency if they have the U.S. dollars in the bank to back it up, which means that even if people wanted to trade in every Hong Kong dollar for U.S. dollars, they could afford to.
So you’d want to do that for flour. One practical problem is that flour or grain isn’t a good store of value. They’re perishable, and might burn or rot or get infested. You have to constantly buy grain from other people and take it off the market to sit uselessly in your silos. Flour or grain are bulky and expensive to store, and if you want to keep the price of flour from falling when there’s a surplus, you would have to buy a lot of it. On the other hand, if there’s a famine, it’s really hard to justify keeping your big stockpile of flour, just for the sake of maintaining the price of flour. In fact, some crops have government price support today and some European countries do something like this.
Basically, that’s why societies went through a stage where they did this with something inherently useless, rare, undifferentiated and imperishable, and now they do it with completely arbitrary numbers in computers whose supply they themselves control absolutely.
Even if this system worked, in the sense that you kept the price of flour constant over time, it would not work well. Supplies of crops are notoriously variable, and a change in the supply or demand of flour would show up as big swings in the price of everything but flour. So, whenever there was a good harvest or farmers planted more wheat and less of other crops, and the price of grain would ordinarily fall, you would still get rising prices for everything else. That’s the same thing as inflation! What if there’s a shortage of grain? That’s even worse: now the price of everything else absolutely crashes. If you owed someone money, and are anyone but a farmer with wheat in the field, paying it will be ruinous. No business can make enough revenue to pay its expenses.
By the way, this reminds me of “The Green Leopard Plague” by Walter Jon Williams, where the unit of currency is the kilocalorie of food.
According to Thomas Piketty, inflation is a very new thing. Aside from exceptional phenomena, such as the Dutch disease, inflation only became a thing in the XXth century. In his bestseller [Capital in the XXIth century] he makes a point about victorian literature. Emily Dickinson and her pairs would write about a protagonist having earnings of 40,000 pounds a year being sure every reader would understand everything they needed to know about the character itself, and that these information would equally understable thirty years after the publication.
Nearly flat rates of inflation have been the norm for all human history until just about a hundred years ago. You must be warned, however, that the rapid technological development of the XXth century was one of the main culprits of inflation, so a no-inflation world means one where innovations don't change too much everybody's life.
A society without inflation would only work in a economically and technically stagnant society.
If in 1715 a person earns let's say 60 Lobes per month, and his family eats 1 loaf of bread per day, he spends 50% of his salary on food.
Now he gets better at his job, technological advancement make it faster etc pp and 30 years later he makes not 60 but 300 Lobes per month. Now he only has to use 10% of his salary for food. Bam!, the Lobe doesn't have the same value anymore than 30 years before, you got inflation.
Yes it is possible, but not likely as useful as a commodity that doesn't degrade or mold, like a precious metal. See How and Economy Grows and Why It Doesn't for an excellent explanation of economics, and for you specifically, food-based currency standards.
For your specific situation, technology improves crop yields, so there is more grain available today than 1860 (when people starved), and 1 lobe will not be worth as much. There will naturally be inflation. Your government might control inflation by burning extra crops to prevent inflation, but that would seem silly.