Search

INTRODUCTION After the U.S. stock market plunged in October 1929, deflation in asset prices was soon followed by declining goods prices as well. Although this episode has attracted enormous scrutiny over the years, surprisingly little attention has been paid to the fact that one of the very few, if not only, areas of appreciation during the bleak years after 1929 was in the stock prices of gold and silver producers. The largest gold producer at the time, Homestake Mining, enjoyed greater than 500 percent capital appreciation between October 1929 and December 1935, even as the Dow Jones index lost almost two-thirds of its value. These gains occurred in the midst of financial turmoil and massive bank failures, with nearly one-third of all U.S. banks failing between 1930 and 1933. At the same time, the great out-performance of gold stocks over this period proves that gold stocks do not require inflationary conditions in order to prosper. Indeed, the recent strength of gold stocks after 2000 has again occurred under conditions in which the threat of deflation again appears much more imminent than that of inflation – as reflected in the sharp rate cuts eventually taking the federal funds rate target down to 1 percent. In this chapter, we assess the performance of gold stocks following two more recent stock market crashes (post–October 1987 and post–March 2000) in relation to the experience with Homestake Mining after the 1929 crash. [ABSTRACT FROM AUTHOR]

INTRODUCTION On February 13, 2002, Japanese Prime Minister Koizumi directed ministries to formulate emergency countermeasures to deflation, stating, in a press release that “while deflation has a varied background, the resolution of the immediate financial problems is indispensable to overcoming deflation” (italics added). Koizumi linked deflation, shown in Figure 9.1, to banking problems and a credit crunch, and called on the Bank of Japan to take action. The same press release goes on to state, “In particular, with regard to the disposal of non-performing loans which presently stands as a top-priority issue, actions shall be taken to achieve concrete progress in line with the ongoing process of special inspections, thereby solidifying the prospects for an early resolution of the so-called ‘non-performing loans problem.’ Meanwhile, the government shall stand ready to take any and all necessary measures to prevent a financial crisis. Overcoming deflation will require the government and the Bank of Japan to act in unison. Therefore, we turn to the Bank of Japan with the request that it act with due audacity in implementing monetary policy” (italics added; Japan Ministry of Foreign Affairs 2002). The call by the Prime Minister for the government to take emergency action reflects the concern that the deflation in Japan, if allowed to persist, would gradually erode the foundation of the economy and eventually lead to a much deeper and dramatic decline reminiscent of the Great Depression in the 1930s. Initially viewed by policy makers as a “good deflation,” price declines were now seen as a harbinger of economic collapse. [ABSTRACT FROM AUTHOR]

INTRODUCTION Since the August 1971 collapse of the Bretton Woods system, financial historians have concluded that there is something almost uncanny about the evolution of the global financial system. They are increasingly struck by the similarities of its origins, the system's continuing stresses, and its occasional setbacks with the origins, stresses, and setbacks that characterized the first global financial system over the years between 1880 and 1914. Both eras arose after a prolonged period of inflation that had disrupted the previous structures of international finance – the outpouring of California gold soon to be followed by the $431 billion (U.S.) in “greenbacks” that were issued to help finance the American Civil War in the earlier period (Dewey 1903: p. 288) and the creation of fiat money to help finance the import of high-priced oil in the later period. Both eras were touched off by a sustained reversal of the previous inflationary experience – deflation in the period 1879 to 1897 and disinflation between 1980 to 1999. Both were, therefore, ultimately the result of a widespread change in monetary regimes – a nearly universal gold standard among the world's richest countries in the first period and a set of monetary rules that restricted the growth of the money supply in the second. In the two periods, the changes in financial returns – the result of falling bond yields and rising financial asset prices – were both unexpected and significant; and, in each case, they eventually led to a series of financial crises – crises that threatened to become systemic. [ABSTRACT FROM AUTHOR]

INTRODUCTION In 1927, the Italian general price level fell by almost 15 percent; deflation continued for six more years, that is, until 1933 (Figure 8.1). This deflation was sharper but briefer than U.S. deflation, which had started in 1920, had an interlude of price stability from 1922 to 1929, and resumed from 1929 to 1933. Italian deflation extended also to asset prices and nominal wages. Share prices fell by 40 percent from January 1927 to December 1933. Prices of existing dwellings declined in the range of 37 percent to 40 percent from 1927 to 1934; those of new constructions declined from 33 percent to 35 percent. Nominal wages had started to decline in 1926, after Mussolini announced the fixing of the exchange rate, and lasted through the end of 1935, for a cumulative drop of 42 percent; real wages fell by a third of nominal wages (14 percent) over the same period. Price and asset deflation was accompanied by a severe economic contraction, however, not of the same order of magnitude experienced by the United States during the same period. Real gross national product fell by approximately 4 percent from the peak of 1929 to the trough of 1934; per-capita real gross national product (GNP) fell by approximately 8 percent. Industrial production declined by approximately 9 percent in the 1929–1933 period and 12 percent in the 1929–1934 period, a decline that was considerably less than in France and much less than in Germany and the United States. Services, on the other hand, held well and partially cushioned the impact of industrial production on national output. [ABSTRACT FROM AUTHOR]

INTRODUCTION In the four decades before World War I, most of the countries in the world adhered to the classical gold standard. The period was characterized by two decades of secular deflation, followed by two decades of secular inflation. This early price level experience should be of great contemporary interest because most advanced countries have returned to an environment of price stability not terribly dissimilar to that of the classical gold standard era. Deflation has had a “bad rap.” Possibly as a consequence of the combination of deflation and depression in the 1930s, deflation is associated with (for some, connotes) depression. On the face of it, the evidence from the late nineteenth century was mixed. On one hand, the mild deflation in the period 1870–1896 was accompanied by positive growth in many countries; however, growth accelerated during the period of inflation after 1896. We distinguish between good and bad deflations. In the former case, falling prices may be caused by aggregate supply (possibly driven by technology advances) increasing more rapidly than aggregate demand. In the latter case, declines in aggregate demand outpace any expansion in aggregate supply. This was the experience in the Great Depression (1929–1933) and the recession of 1919–1921, and may be the case in Japan today. In this chapter, we focus on the price level and growth experience of the United States and Canada, 1870–1913. Both countries adhered to the international gold standard, under which the world price level was determined by the demand and supply of monetary gold, and each member followed the rule of maintaining convertibility of its national currency into a fixed weight of gold. [ABSTRACT FROM AUTHOR]

INTRODUCTION Big deflations are more like singular events than realizations of some stable stochastic process. Thus, the historical particulars, including the perceptions and expectations of central decision-makers should be assessed to understand deflations. This approach is adopted in this study of the two major twentieth-century deflations in Sweden, a big one in 1921–1923 and a small one in 1931–1933. We examine three groups of actors: (1) economists that took part in public debate, (2) policy makers, and (3) wage-setters, as well as interactions between these three groups. The evolution of the policy recommendations of the economists, actions of the policy makers, and behavior of the labor market participants before, during, and after the two deflations is traced. We focus on how their perceptions and expectations were influenced by the experience of the past. The major reason for considering both episodes of deflations is that the two deflations were close in time. This gives an opportunity to explore how the experience during the first deflation episode in the early 1920s influenced beliefs and behavior ten years later during the second deflation. Our general framework can be represented as follows. Prevailing perceptions and expectations held by decision-makers concerning the choice and effects of economic policies are determined by the lessons from past macroeconomic episodes. These perceptions and expectations are revised when new information is obtained from new macroeconomic episodes. The economics profession, policy makers and wage setters are involved in a neverending process of adjusting their beliefs, in short in a learning process, where the interpretation of past events, that is, the lesson of the past, serves as the major source of information for revising perceptions and expectations. [ABSTRACT FROM AUTHOR]

INTRODUCTION For much of the last quarter-century, a principal focus of economists' attention has been inflation and, to some extent, disinflation and the associated costs. More recently, deflation has attracted some interest, although only its possible harmful consequences have been discussed; there has been no mention of deflation as the by-product of increased economic growth interacting with unchanged money growth. Concern over deflation has been prompted by some sharp rises and falls in asset prices in Japan and, more recently, in the United States and to a lesser extent the United Kingdom, and the interest taken in the relationship between these and the general price level. But also important are the actual deflations in prices in Japan, China, Hong Kong, Singapore, and Taiwan, and the near-zero inflation in the United States and Europe. But what, do we know about deflation? It is necessary to go back to before World War II to find episodes in almost any Organisation for Economic Co-Operation and Development (OECD) country except Japan. The purpose of this chapter is to begin to investigate the effects of deflation in the British economy. The depression of the 1930s stimulated many developments in economic analysis. But Keynes's (1936) ideas on deflation in the General Theory and Irving Fisher's debt-deflation theory have been, at least by comparison, neglected. These ideas suggest that debt-deflation causes, or at least worsens, depressions. Our aim in this chapter is to explore what these ideas can contribute to understanding the behaviour of the British economy both in the late nineteenth century and in the interwar years. [ABSTRACT FROM AUTHOR]

INTRODUCTION Episodes of sustained declines in consumer prices have been rare since the 1930s. Recently, however, in addition to Japan's well-known ongoing experience with deflation, persistently falling consumer prices have been seen in other countries, such as Argentina, China, Hong Kong, Singapore, and Taiwan. Indeed, international success in reducing inflation by the mid-1990s was quickly followed by fresh fears of deflation. Deflation may be “worse” than inflation because of firms confronting rising real wages should nominal wage rigidity prevail. In the United States, Federal Reserve Bank of Richmond President J. Alfred Broaddus, having cast more dissents than anyone else in favor of tighter monetary policy in Federal Open Market Committee (FOMC) meetings in the past decade, recently stated that it would be “ironic to have fought all this time to bring the inflation rate down … and then lose price stability on the down side” (see Ip 2002: p. A1). Meanwhile, the FOMC meeting of May 6, 2003, gave official notice of the Fed's concern that “the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level.” As Ip (2003: p. A1) points out, this represented “a profound shift from half a century of preoccupation with fighting inflation.” In the euro area, deflation is a distinct possibility in some of the major economies, especially in Germany (International Monetary Fund 2003). [ABSTRACT FROM AUTHOR]

SEPARATE REGIONS WITH SEPARATE BANKING SYSTEMS The Great Contraction of 1929 to 1939, as Friedman and Schwartz (1963) designated it, must surely be the most carefully studied episode in American monetary history. Their work, and that of Kindleberger (1973), Temin (1976, 1989), Eichengreen (1992a), and many other scholars focusing on particular aspects of the contraction, has done much to clarify the causes and consequences of the collapse, and to clarify the policy mistakes made by the Federal Reserve System. Nevertheless, the flood of books and papers on monetary problems during the Depression shows no signs of abating, suggesting that we have not yet reached the point where we believe that existing explanations are entirely sufficient. Moreover, as this is written, the renewed threat of falling prices makes it more important than ever to examine how financial system performance may be affected by deflationary pressures. Important advances have been made in assessing contagion effects, as opposed to the role of fundamentals, in causing the collapse of a banking system. In this chapter, I will argue that the banking crises of the early 1930s were similar to the “twin crises” – banking and balance of payments crises – that have occurred in developing countries in recent years. The rural regions of the United States were like the developing countries today: dependent on the export of a few commodities in which they had a comparative advantage and with independent and relatively weak banking systems. Declining demand and export prices after 1929 weakened the banking systems in rural regions because they raised doubts about the ability of bank borrowers to repay their loans and led to balance of payments deficits. [ABSTRACT FROM AUTHOR]