Deflation and Economic Growth - Evidence from the Late 19th Century

Sep 21, 2026

The text examines whether sustained deflation—a persistent decline in the overall price level—could be a realistic prospect for the U.S. economy. It argues that forecasts of widespread price declines may be premature, yet it also draws on historical evidence from 1875 to 1900. During this period, the U.S. industrialized and became a world power while prices declined, with real output growth averaging just over 4% and price change around -1%. It contrasts mild, less volatile deflation with the severe deflation tied to the Great Depression.

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Deflation as an Economic Prospect

Mild vs. Severe Deflation

Historical Data and Interpretation

Deflation andEconomic Growth With the consumer price index inflation ratereaching relatively low levels in 1997,some analystshave begun discussing the possibility of deflation—a sustained decline in the price level—as a realisticprospect for the U.S.economy.Forecasts of a wide-spread price decline may be premature,since suchan event has not occurred in the United States formany years and probably will not happen any timesoon.Even if it does occur,however,moderate defla-tion need not be viewed in the negative light in whichit is often portrayed.The U.S.economy has experiencewith sustained deflation,and that experience suggeststhat the real economy can flourish against a backdropof declining prices. The U.S.experience with sustained deflationstretches over a quarter century in the post-CivilWar era,from 1875 to 1900.During this period,theUnited States became an industrial giant and a worldpower.While recessions did occur periodically,thereal economy performed well,on average.Part ofthe policy mix that helped produce this outcome wasa gold standard,which constrained the growth ofthe U.S.money supply and led to a long period ofdeclines in the U.S.price level.Thus,the qualitativestory is that the last quarter of the 19th century canbe characterized by relatively strong growth in realoutput coupled with deflation. The chart displays data which corroborate thisqualitative story.Centered,three-year moving aver-ages of real output growth rates and inflation ratesare pictured,based on estimates of real output andprice levels from 1875 to 1900.The moving aver-ages smooth the data and help us to discern longer-run trends.Since this era is one in which nationalaccounts were not kept as they are today,these dataare crude estimates,but the estimates reflect the best efforts of economists working in this area.The averagerate of change of prices was approximately negative 1percent—a 1 percent rate of deflation—while the aver-age rate of growth in real output was just over 4 per-cent.It seems clear that the U.S.economy was able togrow and industrialize rapidly in an environment of con-sistent price declines. For many economists,worries about deflationare associated with the experience during the GreatDepression,when a sharp deflation was associatedwith a catastrophic decline in real output.Few woulddisagree that a large and unexpected deflation coulddamage economic performance,just as a large andunexpected inflation could.But for smaller,lessvolatile movements in the price level,the evidencefrom the late 19th century suggests that we should becareful about assuming that deflation per se has seriousdetrimental effects on the real economy.Instead,theevidence seems to suggest that strong economic perfor-mance and mild deflation are wholly compatible. -James Bullard Deflation and Economic Growth Percent change,3-year centered moving averoge Source:Gordon,RobertJ,Macroeconomics-5ih ed.,Scot,Foresman and Co.

FAQs

Why do some analysts discuss the possibility of deflation in the U.S. economy?

Because consumer price index inflation reached relatively low levels in 1997, some analysts began discussing deflation as a realistic prospect.

What historical evidence is used to evaluate deflation’s effects?

The text cites the U.S. experience with sustained deflation from 1875 to 1900, when industrial growth and world power status coincided with declining prices.

How does the text distinguish mild deflation from deflation during the Great Depression?

It says the Great Depression involved sharp, catastrophic deflation alongside a large real output decline, while the late 19th-century evidence suggests mild, less volatile deflation can coexist with strong real economic performance.

Sep 21, 2026

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