The deflation of 1873-1896

I believe this period in economic history deserves a closer look, starting with S.B. Saul’s book The Myth of the Great Depression.

1873-79 was quite turbulent, but afterwards the global economy adjusted to deflation.  Those years were among the most beneficial in human history, as the foundations of the modern world were laid.

This is one reason why I become suspicious when deflation is blamed for Japan’s current problems, or when we are told that weak AD could lead to two lost decades in the United States.   I do not favor deflation but its curse need not last forever.

If we are mired in the muck for two decades or more, as Japan has been, I blame low rates of productivity and technical progress.  A simple comparison with North Dakota and Nebraska drives home the point.  For the globe as a whole, increased resource prices are not the same as a productivity boost, but for a single region they can be.


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