Why was deflation occurring during the Great Depression? Normally the economy is in inflation, and there were other financial disasters, such as the Panic of 1893 and 2008, in which the economy was not experiencing deflation. So why was there deflation during the Great Depression? What caused it?
In: 4
Your average consumer had less dollars to spend, so companies were forced to decrease their prices to sell goods and services. Inflation is based on the price change of a basket of goods, thus it went down.
Great depression was a low point in the economy. Less people were working and thus the economy was not stimulated and demand went down while supply stayed about the same. This caused the value of goods to drop in order to sell, which made the overall value of money go up.
This is illustrative of the problem of the old monetary policy. The government did not (or could not) stimulate the economy by increasing the money supply which leads to a deflationary spiral. Productive capacity was unused and dropping because there wasn’t sufficient money injected into the economy. Producers try to reduce prices to move their product (and cut costs) until they could not and simply shut down. So there was even less income in the economy and less demand.
In 2008, the Fed bailout and stimulus kept companies going and demand high shortening the time to recovery. While high inflation is damaging for savers and wage earners whose income cannot keep up, deflation is typically a much worse economic situation.
Latest Answers