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deflation definition us history: Deflation: Definition, Types, and How to Deal with It BusinessTech


Because the international deflation definition us history standard linked interest rates and monetary policies among participating nations, the Fed’s actions triggered recessions in nations around the globe. The Fed repeated this mistake when responding to the international financial crisis in the fall of 1931. This website explores these issues in greater depth in our entries on the stock market crash of 1929 and the financial crises of 1931 through 1933.

For example, in the late 19th century there was a prolonged period of deflation in the United States brought about through advances in technology and manufacturing. Prices went down on most items but consumers still had money to spend. You’ve probably experienced this yourself when thinking about getting a new cell phone, iPad, or TV.

impact of deflation

Regional climate change may switch a dunefield from a largely erosional phase to a stabilization phase if the rainfall increases. Among leaders of the Federal Reserve, differences of opinion also existed about whether to help and how much assistance to extend to financial institutions that did not belong to the Federal Reserve. Some leaders thought aid should only be extended to commercial banks that were members of the Federal Reserve System. Only a handful of leaders thought the Federal Reserve should directly aid commercial banks that did not belong to the Federal Reserve.

Inflation and Deflation

For example, some top consumer staples sector stocks, such as Walmart had positive returns during the deflation of 2008. Consumer staples are generally non-discretionary items like food, household products or medical supplies, whose purchases aren’t reasonably delayed by households. Falling prices that occur from a decline in consumer demand result in possible sales declines for businesses. Businesses not only suffer from lower sales, but may face an increasing debt burden and lower borrowing capacity especially if high interest rates were a driver of the deflation.

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Asset owners like properties find inflation useful as it increases the value of their assets. They will fetch a higher price in the market at the time of their sale. The situation is the opposite for buyers since they will now have to spend more money to purchase that asset. The gold standard was partially abandoned via the international adoption of the Bretton Woods system.

Counteracting deflation

The term originates from the Latin inflare and was initially used in America in 1838 with regard to inflating the currency. The term was used “not in reference to something that happens to prices, but as something that happens to a paper currency”. The resulting imbalance between the quantity of money and the amount needed for trade caused prices to increase.

The fall could result from stagnant growth or due to the central bank’s contractionary monetary policy to restrict the money supply. Deflation is bad for an economy, even though it increases the purchasing power of money. Strategic deflation is caused by policies implemented by the government and central banks to reduce the interest rates. This policy will make it easy for consumers to get a number of loans from the bank.

There have been several deflationary periods in U.S. history, including between 1815 and 1860, and again between 1865 to 1900. One of the most dramatic deflationary period in U.S. history took place between 1930 and 1933, during the Great Depression. Deflation rarely occurred in the second half of the 20th century. In fact, the dramatic and consistent price increases from 1950 to 2000 has been unparalleled since the founding of the country. The most recent example of deflation occurred in the 21st century, between 2008 and 2009, during the period in U.S. history referred to by economists as the Great Recession.

G. Wind-Formed Lake Basins

The views in this essay reflect conclusions expressed in the writings of three recent chairmen, Paul Volcker, Alan Greenspan, and Ben Bernanke. It’s too early to say with certainty what will come of the extraordinary moment we find ourselves in today. Trillions in economic stimulus could well spark a period of high inflation and give rise to a whole new set of fiscal problems. Although deflation is a rare occurrence in the course of an economy, it is a phenomenon that has occurred a number of times throughout history. When the economy goes through a series of deflation, investors tend to view cash reserves as one of their best possible investments.

  • Yardangs are formed in both moderately cohesive sediments, including loess, lacustrine deposits, and ash materials, and harder rocks such as sandstones, basalts, and dolomites.
  • However, not everyone wins from lower prices and economists are often concerned about the consequences of falling prices on various sectors of the economy, especially in financial matters.
  • Buoyed by the rise of industrial mechanization after the war, the prices of goods dropped starting in 1815 and continued to drop until 1860.
  • This further decreases demand, causing businesses to slash prices even more.

Basket weights are updated regularly, usually every year, to adapt to changes in consumer behavior. Sudden changes in consumer behavior can still introduce a weighting bias in inflation measurement. But if the Hoover Institution’s supposition is accurate, FDR’s pro-labor policies could well have worsened the deflationary spiral.

Indicators and Data

These lakes are typically triangular in shape, with the deepest part close to the sand dune, and are found inland in desert regions as well as in coastal areas. If a large amount of deflation occurs so that little or no sand is left on the floor between the trailing arms of parabolic dunes and an impervious rock floor is exposed, a lake may develop. Organic additions from vegetation assist in creating impervious, organically bonded sand–rock in dune depressions. Deflation depressions that are permeable to water can form lakes when they extend below an extensive water table. Such lake depressions may be solely or partially the result of wind action, and the water they contain is often temporary and dependent upon fluctuations in climate. In 2002, Ben Bernanke, then a member of the Federal Reserve Board of Governors, acknowledged publicly what economists have long believed.


By definition, monetary deflation can only be caused by a decrease in the supply of money or financial instruments redeemable in money. In modern times, the money supply is most influenced by central banks, such as the Federal Reserve. When the supply of money and credit falls, without a corresponding decrease in economic output, then the prices of all goods tend to fall. Periods of deflation most commonly occur after long periods of artificial monetary expansion. The early 1930s was the last time significant deflation was experienced in the United States.


Buoyed by the rise of industrial mechanization after the war, the prices of goods dropped starting in 1815 and continued to drop until 1860. Even though prices were dropping, output grew consistently during this time and continued to grow at the same time that prices were dropping until approximately 1860, at the start of the Civil War. While deflation may seem like a good thing, it can signal an impending recession and hard economic times.

consumer prices

High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services to focus on profit and losses from currency inflation.

The fall of prices continued, with agricultural output losing over 50% of its value. As a result, companies went bankrupt, factories were shut down, and economies were severely damaged. A change in fiscal policy can also help to control deflation. Rates of taxation can be reduced to give temporary relief to the people and increase their spending capacity.

Consequences of Deflation

These operational improvements lead to lower production costs and cost savings transferred to consumers in the form of lower prices. This is distinct from but similar to general price deflation, which is a general decrease in the price level and increase in the purchasing power of money. With the rise of monetarist ideas, the focus in fighting deflation was put on expanding demand by lowering interest rates (i.e., reducing the “cost” of money). This view has received a setback in light of the failure of accommodative policies in both Japan and the US to spur demand after stock market shocks in the early 1990s and in 2000–2002, respectively. Austrian economists worry about the inflationary impact of monetary policies on asset prices. Sustained low real rates can cause higher asset prices and excessive debt accumulation.

Furthermore, https://1investing.in/ also have good financial planning in anticipating the deflation in their country. One of them is by preparing an emergency fund that the amount is 6 to 7 times expenses. Economist Irving Fisher developed an entire theory for economic depressions based on debt deflation. A structural deflation existed from the 1870s until the cycle upswing that started in 1895. The deflation was caused by the decrease in the production and distribution costs of goods. It resulted in competitive price cuts when markets were oversupplied.

In the 21st century, most economists favor a low and steady rate of inflation. In most countries, central banks or other monetary authorities are tasked with keeping interest rates and prices stable, and inflation near a target rate. In most OECD countries, the inflation target is usually about 2% to 3% (in developing countries like Armenia, the inflation target is higher, at around 4%). Central banks target a low inflation rate because they believe that high inflation is economically costly because it would create uncertainty about differences in relative prices and about the inflation rate itself. This view was challenged in the 1930s during the Great Depression.

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