[...]throughout the nineteenth century and up until the First World War, a mild deflationary trend prevailed in the industrialized nations as rapid growth in the supplies of goods outpaced the gradual growth in the money supply that occurred under the classical gold standard. For example, in the U.S. from 1880 to 1896, the wholesale price level fell by about 30 percent, or by 1.75 percent per year, while real income rose by about 85 percent, or around 5 percent per year. This deflationary trend was only interrupted during periods of major wars, such as the Napoleonic Wars in Europe and the American Civil War, which the belligerent governments invariably financed by printing paper fiat money.ir dar viena:
In fact in the era before the 1930’s when the natural flexibility of prices and wage rates prevailed and was not impeded by legal constraints, bank credit deflations in the U.S. were swift and devoid of severe economic dislocations. Let me briefly review one such episode.
In the fall of 1839 there occurred a financial crisis in the U.S., which resulted from a massive expansion of the money supply during the 1830’s that was initially stimulated by the legally privileged Second Bank of the United States. From the peak of the business cycle in 1839 to its trough in 1843, the money supply contracted by about one-third (34 percent), almost one–quarter of the nation’s banks collapsed (23 percent), including the Bank of the United States, and wholesale prices fell by 42 percent. Despite—or rather because of—the massive deflation of prices, real GNP and real consumption actually increased during this period by 16 percent and 21 percent, respectively. However, real investment did decline during this period by 23 percent, which was a benign development, because the malinvestments of the previous inflationary boom needed to be liquidated.