Economic history does not support your comments. Apart from the occasional oddity, deflation proved the standard…
Check your history. The period for which we have the most complete record of the price level is the industrialization period of England. From 1650 through 1914 the price level change was 0%. Surely you must know that England was a growing and largely capitalistic economy over this period.
One such example [of an oddity] occurred when Spain brought in large quantities of gold from the Americas.
Exogenous flow disturbances in commodities used as money is the normal state of affairs under a commodity standard. The influx of New World treasure is but one such example - the more recent examples include the California gold strike of 1848, the Australian and New Zealand discoveries of the 1850’s, South Africa (1874-1886), Colorado (1890), and Alaska (1890). Also, technological improvement in gold mining, such as the cyanide process, served to disturb equilibrium.
Deviations in the price level due to these disturbances lasted decades. Bordo (The Gold Standard: Myths and Realities - 1984) estimates that on average the purchasing power of gold took 25 years to return to pre-disturbance levels. Thus, persistent deflation, far from being a normal state of affairs, is the oddity, and it is usually explained by examining government imposed restrictions on the money supply.
BTW, you might want to reconcile why it is that Milton Friedman advocated a deflation rule (as you apparently do), when the evidence is that under a gold standard the quantity of money grew with economic output such that the price level remained constant in the long run. Obviously, if one believes the free market provides the most efficient allocation of resources then logic would dictate the money supply should grow with output. |
