Let's start with inflation. Here is a chart from the St. Louis Federal Reserve that shows the year over year percentage change in inflation.
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Let's start by assuming inflation measuring statistics were less developed in the 1920s than now. That being said, this is all we've got from that period. So -- let's see what this chart says.
First, notice there were two recessions during this period. According to the NBER these were May '23 - July '24 and October '26 - November '27. But also notice the lack of year over year growth for the last four years of the decade. A little inflation is a good thing -- it indicates there is either a strong demand to increase prices or a strong enough increase in costs to allow companies to increase prices. Either way, a little inflation is healthy. However -- there was no inflation for the last four years of the decade. That is not healthy at all.
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Above is the year over year percentage change in inflation from 1930 - 1939. Notice the price collapse in the first four years of the decade. From 1930 - 1934 year over year price movements s were negative. That's a heck of a lot of economic damage to recover from. Notice that year over year prices came back in 1935, but because this number was an increase from a huge drop I would argue it wasn't until 1936 at the earliest that prices got back to a healthy rate of increase. And then it would still take a few years to get back to 1930 levels.
So -- what have we learned? Deflation was an obvious issue in the 1930s. And deflation is not good.
3 comments:
"A little inflation" is NOT healthy -- it's what we have come to feel is normal.
If you're going to have a fiat money system, then the "healthy" option is slight deflation -- this means that the poor cash-economy people are not taxed by inflation and that producers have to make products that are more valuable than the investment value of money.
Inflation is not healthy -- it's just what you've come to believe is normal.
Just because people had become accustomed to cigarette smoke everywhere, didn't make it healthy.
What is needed to augment these data are the data for productivity and incomes. Superimposed it would give a reasonable correlation between basic supply and demand. Since this was a period of a high level of manufacturing as a per cent of the overall economy cut backs in production would translate into a feed back loop for a decrease in demand. If productivity rose without a corresponding rise in the level of incomes then supply would quickly outpace demand. (Sound familiar?) Also, agriculture was a greater portion of the overall economy then. Note the deflation in the early part of the 1920s was the result of a collapse of agricultural commodities' prices. It never recovered throughout that decade and the ensuing depression devastated rural America.
Deflation is NOT caused by falling prices -- especially falling relative prices, such as "agricultural prices."
Deflation is a falling price level: some prices go up but most go down, and, in general, the dollar-cost of day-to-day life is lower.
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