Interventionists have a big bag of tricks to get people to agree to expansions of government power. Many of them take the form of scary outcomes such as “Just imagine how bad things would be if the government didn’t mandate minimum wages” or “What if government didn’t break up monopolies?”
In the same vein, we hear them declare that generally falling prices (i.e. deflation) would be harmful and therefore we need government policy through the Federal Reserve to keep that from happening. The same folks usually also contend that “mild” inflation is an economic stimulant.
In the letter to the Wall Street Journal below, excerpted in part, GMU economics professor Don Boudreaux takes aim at that idea:
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. . . .
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.