This article posits an information channel as an explanation for sudden inflations. Households saving via nominal government bonds face a choice whether to acquire costly information about future government surpluses. They trade off the cost of acquiring information about the surpluses that back bond repayment against the benefit of a more informed saving decision. Through the information channel, small changes in the economic environment can trigger large responses in consumer behavior and prices. This setting explains why there can be long stretches of time during which government surpluses have large movements with little inflation response; then at some point, something snaps, and a sudden inflation takes off that is strongly responsive to incoming fiscal news.

We analyze the democratic politics of a rule that separates capital and ordinary account budgets and allows the government to issue debt only to finance capital items. Many national governments followed this rule in the 18th and 19th centuries and most US states do so today. Despite its simplicity, this 1800s financing rule provides excellent incentives for majorities to choose an efficient mix of public goods in an economy with a growing population of overlapping generations of long-lived but mortal agents. In a special limiting case of our model where the demographics make Ricardian equivalence prevail, the 1800s rule does nothing to promote efficiency. But when the demographics imply even a moderate departure from Ricardian equivalence, imposing the rule substantially improves the efficiency of democratically chosen allocations. We calibrate some examples to U.S. demographic data and use our findings to offer a tentative explanation for why the 1800s rule was abandoned by the Federal government but not by state governments in the twentieth century