Not All Deflation Causes Suffering

by Don Boudreaux on September 16, 2022

in Growth, History, Monetary Policy, Myths and Fallacies

Here’s a letter to the Wall Street Journal:


Roger Lowenstein’s review of Troy Senik’s biography of Grover Cleveland is excellent (“‘A Man of Iron’ Review: Grover Cleveland, Honest to a Fault,” September 17). But Mr. Lowenstein makes a small error when, implicitly commenting on the gold standard in place during Cleveland’s time as president, he says that “Cleveland seemed blind to larger shortcomings in the monetary system (the U.S. had suffered persistent deflation since the 1860s).”

Contrary to popular (and, alas, even to much professional) economic opinion, deflation is not necessarily – as it is when caused by contractions of the money supply – a source of suffering. Indeed, the “persistent deflation” that Mr. Lowenstein decries was a natural result of the enormous growth during those decades in the productivity of the U.S. economy.

U.S. industrial output skyrocketed in the decades immediately following the Civil War. It rose in 33 of the final 40 years of the 19th century, nearly all which 40 years witnessed deflation. One result was that annual U.S. industrial output in 1900 was nearly 7.5 times higher than it was in 1860* – a result explained by population growth. On a per-capita basis, industrial output per American was about three times higher in 1900 than it was in 1860. Also increasing during those four decades was agricultural productivity.**

With a stable supply of money chasing ever-more goods (and services), the natural result was a falling price level. And it’s a result that deserves applause. As economist George Selgin explains in his pioneering 1997 study Less Than Zero: The Case for a Falling Price Level in a Growing Economy, “even zero inflation would have involved some failure of money price signals to reflect transparently and accurately the true state and progress of real production possibilities.”***

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* Joseph H. Davis, “An Annual Index of U.S. Industrial Production: 1790-1915,” Quarterly Journal of Economics, Vol. 119, November 2004, pages 1177-1215. See especially Table III.

** Lisa Geib-Gundersen and Elizabeth Zahrt, “A New Look at U.S. Agricultural Productivity Growth, 1800–1910,” Journal of Economic History, Vol. 56, September 1996, pages 679-686.

*** George Selgin, Less Than Zero, 2nd Edition (Washington, DC: Cato Institute, 2018). The quotation in the text is from page 13 of the original 1997 Institute of Economic Affairs edition.

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