lation has occurred, since purchasing power has increased.
Rising productivity and reduced transportation cost created structural deflation during the peak productivity era of from 1870-1900, but there was mild inflation for about a decade before the establishment of the Federal Reserve in 1913. There was inflation during World War I, but deflation returned again after that war and during the 1930s depression. Most nations abandoned the gold standard in the 1930s. There is less reason to expect deflation, aside from the collapse of speculative asset classes, under a fiat monetary system with low productivity growth.
In mainstream economics, deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of money going down and the supply of goods going up. Historic episodes of deflation have often been associated with the supply of goods going up without an increase in the supply of money, or the demand for goods going down combined with a decrease in the money supply. Studies of the Great Depression by Ben Bernanke have indicated that, in response to decreased demand, the Federal Reserve of the time decreased the money supply, hence contributing to deflation. p> Demand-side causes are:
Growth deflation: an enduring decrease in the real cost of goods and services resulting in competitive price cuts.
A structural deflation existed from 1870s until the end of the gold standard in the 1930s based on a decrease in the production and distribution costs of goods. It resulted in competitive price cuts when markets were oversupplied. By contrast, under a fiat monetary system, there was high productivity growth from the end of World War II until the 1960s, but no deflation [6].
Productivity and deflation are discussed in a 1940 study by the Brookings Institution that gives productivity by major US industries from 1919 to 1939, along with real and nominal wages. Persistent deflation was clearly understood as being the result of the enormous gains in productivity of the period [7]. By the late 1920s, most goods were over supplied, which contributed to high unemployment during the Great Depression [8].
Cash building deflation: attempts to save more cash by a reduction in consumption leading to a decrease in velocity of money.
Supply-side causes are:
Bank credit deflation: a decrease in the bank credit supply due to bank failures or increased perceived risk of defaults by private entities or a contraction of the money supply by the central bank.
2.1 Money supply side deflation
From a monetarist perspective, deflation is caused primarily by a reduction in the velocity of money or the amount of money supply per person.
A historical analysis of money velocity and monetary base shows an inverse correlation: for a given percentage decrease in the monetary base the result is near...
