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The third was between 1930-1933 when the rate of deflation was approximately 10 percent; part of the United States' slide into the Great Depression, where banks failed and unemployment peaked at 25%.
The deflation of the Great Depression, as in 1836, did not begin because of any sudden rise or surplus in output. It occurred because there was an enormous contraction of credit (money), bankruptcies creating an environment where cash was in frantic demand, and the Federal Reserve did not adequately accommodate that demand, so banks toppled one-by-one. From the standpoint of the Fisher equation, there was a concomitant drop both in money supply and the velocity of money which was so profound that price deflation took hold despite the increases in money supply spurred by the Federal Reserve.
Throughout the history of the United States, inflation has approached zero and dipped below for short periods of time (negative inflation is deflation). This was quite common in the 19th century and in the 20th century before World War II.
Some economists believe the United States may be currently experiencing deflation as part of the financial crisis of 2007-2010; compare the theory of debt-deflation. Year-on-year, consumer prices dropped for six months in a row to end-August 2009, largely due to a steep decline in energy prices.
Consumer prices dropped 1 percent in October, 2008. This was the largest one-month fall in prices in the US since at least 1947. That record was again broken in November, 2008 with a 1.7% decline. In response, the Federal Reserve decided to continue cutting interest rates, down to a near-zero range as of December 16, 2008 [18]. In late 2008 and early 2009, some economists feared the US could enter a deflationary spiral. Economist Nouriel Roubini predicted that the United States would enter a deflationary recession, and coined the term "stag-deflation" to describe it [19]. It is the opposite of stagflation, which was the main fear during the spring and summer of 2008. The United States then began experiencing measurable deflation, steadily decreasing from the first measured deflation of - 0.38% in March, to July's deflation rate of - 2.10%. On the wage front, in October 2009 the state of Colorado announced that its state minimum wage, which is indexed to inflation, is set to be cut, which would be the first time a state has cut its minimum wage since 1938 [19].
6. Conclusion
Whereas policy makers today speak of the need to avoid deflation their assessment is colored by the experience of the bad deflation of the 1930s, and its spread internationally, and the ongoing deflation in Japan. Hence, not only do policy makers worry about deflation proper they also worry about its spread on a global scale.
If ideology can blind policymakers to introducing necessary reforms then the second lesson from history is that, once entrenched, expectations of deflation may be difficult to reverse. The occasional fall in aggregate prices is unlikely to significantly affect longer-term expectations of inflation. This is especially true if the monetary authority is independent from political control, and if the central bank is required to meet some kind of inflation objective. Indeed, many analysts have repeatedly suggested the need to introduce an inflation target for Japan. While the Japanese have responded by stating that inflation targeting alone is incapable of helping the economy escape from deflation, the Bank of Japan's stubborn refusal to adopt such a monetary policy strategy signals an unwillingness to commit to a different monetary policy strategy. Hence, expectations are even more unlikely to be influenced by other policies ostensibly meant to reverse the course of Japanese prices. The Federal Reserve, of course, does not have a formal inflation target but has repeatedly stated that its policies are meant to control inflation within a 0-3% band. Whether formal versus informal inflation targets represent substantially different monetary policy strategies continues to be debated, though the growing popularity of this type of monetary policy strategy suggests that it greatly assists in anchoring expectations of inflation.
7. References
1. Borio, Claudio, and Andrew Filardo. "Back to the Future? Assessing the Deflation Record." Bank for International Settlements, March 2004.
2. Burdekin, Richard C.K., and Pierre L. Siklos. "Fears of Deflation and Policy Responses Then and Now." In Deflation: Current and Historical Perspectives, edited by Richard C.K. Burdekin and Pierre L. Siklos. New York: Cambridge: Cambridge University Press, 2004.
3. Brezina Corona. How Deflation Works? Rosen Young Adult, 2007.225p.
4. Capie, Forrest, and Geoffrey Wood. "Price Change, Financial Stability, and the British Economy, 1870-1939." In Deflation: Current and Historical Perspectives, edited by Richard C.K. Burdekin and Pierre L. Siklos. New York: Cambridge: Cambridge University Press, 2004.
5. Charles Stanton Devas. Political Economy. LLC, 2009.310p.
6. "Deflation", http://en.wikipedia.org/wiki/Deflation
7. Friedman, Milton, and Anna J. Schwartz. Monetary Trends in the United States and the United Kingdom. Chicago: University of Chicago Press, 1982.
8. Humphrey, Thomas M. "The Real Bills Doctrine." Federal Reserve Bank of Richmond Economic Review 68, no.5, 1982.
9. Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists", 2000.
10. International Monetary Fund. "Deflation: Determinants, Risks, and Policy Options "Findings of an Independent Task Force." April 30, 2003.
11. John Harold Wood. A history of central banking in Great Britain and the United States. Cambridge University Press, 2005.439p.
12. Krugman, Paul. "Its Back: Japan's Slump and the Return of the Liquidity Trap." Brookings Papers on Economic Activity 2 (1998): 137-205.
13. Meltzer, Allan H. A History of the Federal Reserve. Chicago: Chicago University Press, 2003.
14. Milton Friedman, Anna Jacobson Schwartz. A monetary history of the United States, 1867-1960. Princeton University Press book, 1971.860p. http://books.google.ru/books? id=Q7J_EUM3RfoC&printsec=frontcover&dq=related: ISBN0521837995&lr=#v=onepage&q&f=false
15. Siklos, Pierre. "Deflation". EH.Net Encyclopedia, edited by Robert Whaples. May 11, 2004. URL http://eh.net/encyclopedia/article/siklos.deflation
16. Siklos, Pierre. "Deflation". EH.Net Encyclopedia, edited by Robert Whaples. May 11, 2004. URL http://eh.net/encyclopedia/article/siklos.deflation
17. Robert Samuelson. "The specter of deflation". November 11, 2008, http://articles.ocregister.com/2008-11-11/opinion/24737155_1_deflation-consumer-prices-mild-inflation
18. Richard C.K. Burdekin. Deflation. Current and Historical Perspectives. Cambridge University Press, 2004.340p.
19. Randall E. Parker. Reflections on the Great Depression. Edward Elgar Publishing, 2002.230p.
20. Thomas F. Cargill, Michael M. Hutchison, Takatoshi Itō. Financial policy and central banking in Japan. Massachusetts Institute of Technology, 2000.196p. http://books.google.ru/books? id=gt6UBd0UXXUC&printsec=frontcover&dq=related: ISBN0521837995&lr=#v=onepage&q&f=false
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