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Deflation History
By Stephen Smith
March 18, 1998

This story is part of a larger feature about deflation:
The World Turned Upside Down: An End to Inflation?

If our economy is on the verge of deflation, this won't be the first time. American history is marked by recurring periods of deflation and inflation, what economists describe as the natural ebb and flow of any market economy. But more drastic episodes stand out as warning beacons about what can happen when deflation whirls out of control.

When you think total economic disaster, you think "The Great Depression." The misery began in 1929 and lasted more than a decade. Millions of Americans lost their jobs, their farms, their homes. Many more struggled to stay just above the deluge.

Man: It was a tough period to go through. Things were not very expensive, but if you didn't have money, you couldn't buy it anyway.

Woman: An old farmer worked hard out there in the field, laboring from sunup to sundown. And my husband was out there working in the corn fields. And he said, "We're not getting nuthin' for our food. We're not gettin' nuthin'."

Man: I remember one Christmas morning very vividly. We had Christmas services early in the morning that year. And people came with their Christmas cards to exchange with one another because they didn't have the postage.

The Great Depression was a world-wide economic catastrophe, the product of converging economic and historical currents that swelled to flood-stage in October of 1929, when Wall Street collapsed.

Michael Bernstein: The stock market crash is the great initiating event. It starts the Great Depression.

Michael Bernstein is an economic historian at the University of California at San Diego.

Bernstein: It destabilizes the financial sectors of the country, leads to an array of bank failures where literally banks have to lock their doors because they don't have sufficient cash to meet the demands of their customers, and that begins this precipitous series of events that lead to industries closing down, wide-spread unemployment, and of course, great distress in the farm belt.

Economic troubles had been building for years before the crash of '29. Throughout the '20s, farms and mines were chronically depressed. 600 banks collapsed each year. Prices plunged, and most households saw a drop in real income over the decade. Yet labor historian Peter Rachleff of Macalester College points out that huge sectors of the economy thundered along, especially automobiles, tires, and electrical products.

Rachleff: These were industries where worker productivity was quite high, but workers were not earning back a significant share of what they were producing. So workers were increasingly turning to credit as a way to acquire consumer goods - refrigerators, vacuum cleaners, radios, and automobiles - that they were producing. And the wages never caught up. And that led to goods that were repossessed that weren't done being paid for. That led to inventories swelling and workers being laid off or work weeks being cut, and spiral downwards then from that point in 1929 to really a low point, say, in 1932-33, when about a third of the work force was out of work altogether.

Prices tumbled by some 30%. Historian Michael Bernstein says across-the-board deflation lasted almost five years.

Bernstein: It's hard for us to understand, living in the late 20th century, through so many years of steady inflation. And what might look like a wonderful thing to our eyes, namely falling prices, was for many, many people in the United States in 1929, a disaster.

Man: When they went after a farmer who could not meet his financial obligations, liquidated him, and took - in many instances - everything except the farmer's wife and kids... that was the bitter end for a farmer.

Man: I knew a man [who] went out looking for work at a dollar a day.... Could not be found.

Americans today remember the Great Depression, but there was another dramatic period of deflation worth recalling, an era in which Americans fought an intense battle over the very value of money.

At the end of the 19th century, America lurched into a deflationary tailspin. Collapsing railroad companies helped touch off the crisis in the early 1890s. The resulting depression hit hardest in farm country, where commodity shipments depended on railroads and where the bulk of America's population still lived. Bank failures and farm foreclosures swept the landscape. In the winter of 1895, a newspaper journalist described life at a coal mining camp in Iowa:

Journalist: The 500 mine families of this locality are in the most destitute circumstances. They have little to eat in the way of wholesome food and their clothing - if it can be called that - is in utter tatters. All have a sickly appearance.

A banker in Sargent, Nebraska, wrote:

Banker: It is enough to make me heartsick to look at this once prosperous country. The suffering is terrible. We have several families who, for a month past, have had nothing to eat but flour and water, and are very thankful to get that. Scores of women and children stay barefooted for want of something to cover their feet. We are compelled to put our pride aside and ask for aid - immediate aid... anything to eat or wear.

Sparked by dropping prices, the depression took hold after a national financial panic in 1893. At the time, the value of the US dollar was pegged to the national gold reserves. Farmers and small business owners clamored for relief from Washington. A radical political movement called Populism swept the Midwest, demanding that the dollar be based on silver as well as gold. Populists said this "bi-metal" standard would ease the crushing burden of debt and help raise deflated prices. The silver plan was bitterly opposed by the big eastern corporations who had an economic stake in gold. In 1896, democratic presidential candidate William Jennings Bryan argued the Populist position in his famous "Cross of Gold" speech, read here by actor Ed Begley.

Bryan: You come to us and tell us that the great cities are in favor of the gold standard. We reply that the great cities rest upon the our broad and fertile prairies. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the streets of every city in the country.

A catchy line, but it wasn't enough. Bryan lost the presidential race. It may be hard to imagine today, but a wide cross-section of America debated the details of monetary policy, because deflation and depression touched every American. The theme was so common that one of our culture's favorite stories is shot through with allegorical references to the fight over silver and gold.

"The Wizard of Oz" was written by former South Dakota newspaperman L. Frank Baum and first published in 1900, just after the American economy had started to recover. The movie came out four decades later. Political scientist Gretchen Ritter of the University of Texas says the Wizard of Oz is an allegorical map of monetary politics in the 1890's. Dorothy represented the common person. Many of the other characters were also allegorical.

Ritter: So the Scarecrow is the average farmer.

The Scarecrow: I haven't got a brain. Only straw.

Ritter: The Tin Man is an industrial worker who has lost his soul, if you will, lost his heart.

Dialogue: "Bang on my chest if you think I'm perfect." "Beautiful, what an echo!" "It's empty..."

Ritter: The Cowardly Lion, many people have taken to represent William Jennings Bryan. He's a politician who has a big roar but has a little trouble with courage.

The Cowardly Lion: I'll fight you with one paw tied behind my back.

Ritter: The Emerald City is, of course, a green city, and therefore the city of money. It is also the political center of the country, and as such, it is Washington. And so the Wizard, our other big figure, could be taken to be the president, or politicians in general, who have power - somebody who promises a lot but delivers little.

Dialogue: "You're a very bad man!" "Oh no my dear, I'm a very good man - just a very bad wizard."

The key detail changed in the movie was the color of Dorothy's slippers. MGM made them Technicolor ruby red, but Frank Baum's original Dorothy wore silver slippers. When she and her chums walked the golden road to Oz, Dorothy was mixing silver and gold. And Oz (O-Z, after all) is the acronym for the measure of gold and silver, the ounce. Ritter points out that when it comes to solutions, the Wizard is bankrupt. Dorothy and the rest must rely on their own innate power, just as 1890s Washington held no answers for those suffering from the depression.

Dialogue: "Will you help me? Can you help me?" "You've always had the power to go home." "I have?" "Why didn't you tell her before?" "Because she wouldn't have believed me. She had to find out for herself."

About 1897, after five years of struggle, deflation eased. Prices in America started to rise again and the economy recovered. But not, historians say, because of the wizards in Washington. Gold was still the monetary standard. Among the forces that healed the economy: a steady flow of immigration to the US which created a new, cheaper labor force and a vast new pool of consumers. But even though the American economy righted itself by the turn of the 20th century, it was still vulnerable. Prices were falling again just seven years later.