By ROBERT J. SAMUELSON
THE WASHINGTON POST

IN THE history of the past 30 years, the rise and fall of inflation plays a huge and unheralded role in shaping politics and social change. The advent of double-digit inflation in the United States and Britain propelled Mrs Margaret Thatcher and Mr Ronald Reagan to power, transforming politics in these countries and the world.

Low inflation has now sustained America's economic boom, which helped President Bill Clinton survive impeachment and has buoyed the stock market. But with inflation apparently tamed, do we now face the opposite threat: deflation? The fact that it is being asked reflects a dramatic reversal. In 1979, inflation, as measured by the consumer price index, was 13 per cent in the US. In France, Italy and Britain, it was 12, 20 and 17 per cent respectively. In 1998, inflation in those countries was 1.6 per cent (US), 0.3 per cent (France), 1.5 per cent (Italy) and 2.7 per cent (Britain). Behind these figures lies an intellectual revolution.

What was discarded was the notion that easy money could, by stimulating borrowing and spending, expand production and reduce unemployment. Just the opposite occurred.

By fostering inflation, it upset the economy. Companies thought they could pass along higher costs in higher prices. Workers expected that ever-higher wages would more than offset inflation. The Federal Reserve lurched between loose policies, which raised inflation, and tight policies, which tried to quell it.

In the 1981-82 recession, short-term interest rates reached 22 per cent; monthly unemployment peaked at 10.8 per cent.

It was this harsh episode -- and the growing conviction that the Fed would resist any run-up of prices -- that gradually purged most inflationary expectations.

The same thing happened in Europe. But hardly anyone imagined that the process might lead to deflation. This possibility is no longer outlandish. The Economist recently put deflation on its cover; last week, German Finance Minister Oskar Lafontaine warned against deflation.

Just as inflation is the persistent rise of most prices -- not just some prices going up -- deflation is the persistent fall of most prices.

We do not have that yet in the US. Last year's low inflation blended price increases and decreases. College tuition was up 3.9 per cent and hotel rates 3.8 per cent. Meanwhile, gasoline was down 15.4 per cent and computers 35.8 per cent. What we have had is "disinflation" -- a drop of inflation.

So have most countries. But not all. Japan and China have had modest deflation. In Japan, consumer prices have dipped slightly in recent months, and wholesale prices declined 4.4 per cent in 1998. In China, retail prices have dropped for 14 months, says economist Nicholas Lardy of the Brookings Institution. More conspicuous has been the deflation of globally traded raw materials -- oil prices are at 1977-78 levels; soybean prices are the lowest since 1976.

Economist Rosanne Cahn of Credit Suisse First Boston attributes US disinflation to three causes: worldwide over-investment that has created surpluses; deregulation of some industries which has intensified competition; and weak bargaining power by workers, which has enabled companies to hold down labour costs.

But deflation, where it exists, seems to stem from one main cause: gluts. Too much supply is chasing too little demand. Even in 1995, China reported that production capacity for more than 900 major goods was almost twice the demand, says Mr Lardy. Japan's industrial output in 1998 was slightly lower than in 1989, says Mr Douglas Ostrom of the Japan Economic Institute.

Because industry had expanded, he reckons that factories operated at about 82 per cent of capacity. As for raw materials, Asia's slump has depressed worldwide demand and led to oversupply.

If mild, deflation is tolerable. Lower prices expand people's purchasing power. Saudi Arabia and Texas may lose from lower oil prices, but consumers, paying less for gasoline, may spend more for toys or software. The effects on the economy may cancel.

The damage to producers may overwhelm any benefit to consumers. If prices sink too low, companies cannot cover costs or service debts. They fire workers, cancel investment or go out of business.

The process can feed on itself, as the buying power of distressed companies -- or countries -- shrinks. Or consumers may postpone purchases because they think prices will drop further.

The obvious ways to stop deflation are to curb supply or expand demand. As noted, the first is painful and possibly self-defeating. But inevitably, it is occurring. Even some Japanese companies are shutting plants and resorting to layoffs.

Expanding demand is more fun. For this reason, The Economist urges the European central bank to cut interest rates and chides the Bank of Japan for not expanding the money supply faster. But these blunt approaches may not fully erase oversupply.

The largest bulwark now against worldwide deflation is the festive US economy. But there are contradictory signs. Since early 1998, industrial utilisation has declined. This suggests possible surpluses that could depress prices, profits and production.

For now, deflation remains a spectre. But should the spectre become reality, we can be sure that deflation, just like the inflation before it, will unsettle the social and political order.