Is there any way to curb, limit or even reverse inflation, and if so what would the effect on the economy be? I know very little of economics so, please forgive my ignorance, but what would happen if say, the President or Fed put policies in place to say, redact the rate of inflation and prices back to say, 1954 levels? IE not only were prices set to roughly the same amount as they were in 1954, but so was the worth of the currency? What would happen economically?
Inflation is
rate of increase in price levels. So, inflation these days is not much different than in the 1950s. Nothing has to be done to get there.
The
price levels of course, is another matter. If all you cared were numbers written in stores, it is a piece of cake. All the Fed would have to do is issue a New Dollar, and exchange every current dollar at a rate of about USD$9=NewUSD$1. Bingo - problem solved. Minor administrative cost in issuing the new bills and coins, etc. - but no big deal. Of course, it would also be completely useless and leave the public suspicious that the Fed is run by a bunch of lunatics, but, whatever.
If you want to reverse price levels to the level of 1954 without changing money you would need a horrid deflationary episode (deflation, is the opposite of inflation: this is the rate of price decrease). To see why, think of it this way. Suppose you have an annual income of USD$180,000 (you are a rich guy) and bought a house for which you have an outstanding mortgage for USD$900,000. If such a deflationary episode were to happen, your income would have to decrease to USD$20,000. But your mortgage - in a written contract, which does not deflate - would still be USD$900,000. Obviously, you would never be able to do the payments, so you would have to go bankrupt. The bank that lent you the money will be left with a house worth USD$100,000 - but it lent you 9 times as much! So the bank will go bankrupt as well. Also, of course, during the entire deflationary period nobody would be investing anything: cash does not deflate (if it is written on the bills "one dollar" it would remain one dollar). So, everybody would try to hold cash - it would be the best investment imaginable. Nobody would be able to borrow, nobody would buy any durables they can avoid, etc. To sum up, I guess, it is doable - if you are willing to go through, say, 50 years of the sort of economic depression that would make the Great Depression seem like a minor hiccup. Chances are, a revolution would happen long before that, though
