Thomas Tooke

The rationale for deflationary period advocated in 1920.

In Uncategorized on May 12, 2012 at 1:55 am

Here is what Kemmerer wrote about the need for a deflationary period in 1920.


Inflation for a time has a stimulating effect upon business. Things boom, and many classes of people feel prosperous when prices are rising, but this stimulant, like alcohol when taken in excess, always has its “morning after”. A falling and prospectively falling price level is depressing to business. It throws a wet blanket over industry. When the prospects are strong for a period of declining prices consumers postpone purchases, retailers and wholesalers let their supplies run down, manufacturers “play safe” both in running their plants and in purchasing raw materials.

New buildings and other new capital equipment are postponed for the day of lower prices. The business world refuses to capitalize inflated prices. The expectancy of heavy price reductions breathes a spirit of uncertainty into the economic atmosphere. A falling price level therefore would not be universally popular however much most of us at the present time think we would like to see it.

The third evil result of a substantial and continuing decline in price level is its harmful effect upon welfare of labor. This is a natural result of the depressing effect upon business just described. When business holds back in anticipation of falling prices the demand for labor declines and men are laid off. Increasing unemployment causes hardship and is a potent factor in forcing down wages and weakening the hold of trade unions on their men. Labor naturally resists wages reductions even though the price level is falling, and this means that a period of falling prices is likely to be characterized by many labor troubles.

The hardships therefore and the resulting political difficulties of carrying through a program of price level reduction through deflation are so serious that we should enter upon such a program, if at all, only after careful deliberation and under the pressure of strong reasons. Are there strong reasons why we should deliberately suffer these hardships and adopt a program of deflation? I believe there are, provided the deflation be not excessive, and that the program be carried through with firmness, moderation and reason.



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