Rothbard on The First Great Deflation (1839-1843)

One of my Christmas presents was Murray Rothbard's "A History of Money and Banking in the United States". He writes about a period between 1839 to 1843 where the United States experienced deflation on a massive scale. Prices were estimated to have dropped by 42 percent, or 10.5 percent per year. According to the Keynesians, this should destroy the economy in a liquidity trap. Rothbard writes about what actually happened.

In a fascinating analysis and comparison with the deflation of 1929-1933 a century later, Professor Temin shows that the percentage of deflation over the comparable four years (1839-1843 and 1929-1933) was almost the same. Yet the effect of real production on the two deflations were very different. Whereas in 1929-1933, real gross investment fell catastrophically by 91 percent, real consumption by 19 percent, and real GNP by 30 percent; in 1839-1843, investment fell by 23 percent, but real consumption increased by 21 percent and real GNP by 16 percent. The interesting problem is to account for the enormous fall in production and consumption in the 1930s, as contrasted to the rise in production and consumption in the 1840s. It seems that only the initial months of the contraction worked a hardship on the American public and that most of the earlier deflation was a period of economic growth. Temin properly suggests that the reason can be found in the downward flexibility of prices in the nineteenth century, so that massive monetary contraction would lower prices but not particularly cripple the world of real production on standards of living. In contrast, in the 1930s government placed massive roadblocks on the downward fall of prices and wage rates and hence brought about severe and continuing depression of production and living standards.

The economy went on. Economic calculation was not inhibited by deflation.