When Deflation Is Good

“What’s so bad about deflation?” asks Slate. “After all, it’s a pleasant surprise when prices of many items fall.” As it turns out, there is good deflation and bad deflation, but which is which? “Bad deflation is the kind we had in the Great Depression…This deflation was driven by a decline in output, demand, and credit — too little money and wages chasing too many goods and workers. The Depression-era cratering of wages and prices was disastrous because it rendered companies and consumers less able to pay their debts. But there have been periods of good deflation, in which prices fall even as the economy booms. In the 1920s, known to this day as the Roaring ’20s because of the decade’s economic vibrancy, prices fell about 1 percent per year…The reason: Innovations like the railroad, telegraph, electricity, and the assembly line helped farmers, entrepreneurs, and manufacturers produce and ship their goods more cheaply and efficiently.”