Price deflation is a decrease in consumer prices. It is usually associated with long and sustained recessions. Such decrease in prices is led by a reduction in total consumption. Total consumption in the country is dependent on several factors such as the total money invested in stock as well as the total hoarding of money by the producers and wage earners. Price deflation is not necessarily the evil it has been made out to be, since falling prices increase the standard of living of the poor, while reducing that of the business owners.
The first long deflationary phase in the U.S. was from 1873-1896. During these years, production increased due to excessive savings/investments and high productivity, while the money supply grew at a slower pace, causing a mismatch between the total money available for consumption and the value of products on sale, and resulted in a fall in prices. According to economist Murray Rothbard`s book, History of Money and Banking in the United States, during this phase, general prices in the country fell 1% on an average each year. This translates into a fall of about 20% over 23 years. Therefore, a person with stagnant wages grew 20% richer. This was also a time of growing national income and increased wealth. In fact, the GDP of the country doubled between 1879-1888, and it was the most productive decade in the nation's history, a record held until today. Ironically, this era has been called a depression by many economists, solely based on the price declines witnessed during this period.
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