bhaskar saikia

When we think of inflation today, we often imagine rising grocery bills, expensive fuel, and headlines warning of economic instability. But history tells us a different—and surprisingly positive—story.

Take 16th-century Spain. The Spanish conquistadors, Hernán Cortés and Francisco Pizarro, returned from the New World with staggering amounts of gold and silver. Seville became the financial capital of the world as these treasures poured in. At first glance, this might seem like a recipe for instant prosperity—and it was, for a while.

At that time, Europe faced an acute shortage of money, which consisted mostly of gold and silver coins. This scarcity strangled trade and limited business growth. The influx of New World silver changed everything. Freshly minted coins increased the money supply, driving up prices—what we now call inflation.

Far from being a problem, this surge in money circulation sparked entrepreneurship. For example, in mining, the definition of an “ore” depends not on its chemical composition but on whether it can be mined at a profit. A mineral becomes an ore only when the market price of the metal it contains exceeds the cost of extracting it. After gold prices skyrocketed post-2008, many mines once deemed unprofitable reopened for this very reason. Spain’s 16th-century boom worked the same way—resources once ignored suddenly became valuable.

However, Spain’s prosperity eventually spiraled into the world’s first recorded instance of hyperinflation. Ship after ship of treasure kept flooding the economy, pushing prices out of control. The lesson? A little inflation can fuel growth; too much will burn the system down.

England’s experience in the early 19th century offers another perspective. During the Napoleonic Wars, the British government suspended the gold standard, allowing the pound to float without being tied to gold. This meant the government could print more money, helping to keep the economy running despite crushing war debts. The economy remained relatively prosperous—until 1821, when the gold standard was restored.

The return to gold pegging restricted money supply, leading to deflation—a general fall in prices. At first, cheaper goods might sound like a good thing, but deflation stifles business. When prices keep falling, consumers delay purchases, knowing they’ll get a better deal later. This slows sales, cuts production, and can cause economic decline. Post-1821 Britain saw prices drop by over 50%, wreaking havoc on its economy.

Japan offers a modern case study. Since the 1990s, it has struggled with deflation. Former Prime Minister Shinzo Abe’s administration worked hard to reverse this trend, recognizing that mild inflation is necessary to keep an economy healthy.

So, what’s the takeaway?

Neither hyperinflation nor deflation is good for an economy. But controlled inflation—just enough to encourage spending, investment, and resource utilization—can work wonders.

And if you’ve ever wondered what central bankers really do, here’s part of the answer: they walk the tightrope between too much and too little inflation, knowing that balance is the key to sustained prosperity.