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Basically, it is a policy choice:
[John Kemp via FT Alphaville]
[John Kemp via FT Alphaville]
Prolonged declines in the general price level (”deflation”) in the United Kingdom after the Napoleonic Wars and in the United States between 1879 and 1896 which were characterised by an especially brutal compression of agricultural prices and wages and had particularly devastating impacts on rural economies and rural states (especially southern and western parts of the United States during the final quarter of the nineteenth century).
Something similar though far less enduring occurred to rural communities in the United States during the early 1930s. Poverty and unemployment were widespread, but it was rural farming communities that were hit the hardest by a combination of falling prices and prolonged drought. Perhaps the most iconic representation of the Depression, the Joad family, in John Steinbeck’s masterpiece “The Grapes of Wrath” were farmers driven west by a combination of depression and crop failures.
What characterised all these prolonged deflations was the stubborn attempt to restore dolllar and sterling parities to gold after they had been suspended during wartime conditions at the pre-war parities. Britain tried to restore sterling to the pre-Napoleonic gold parity, the United States restored gold to the pre-Civil War parity, and both the United States and the United Kingdom restored gold convertibility at pre-1914 parities during the 1920s.
In each case, economic conditions, relative prices and the stock of money had changed significantly during the wars, and policymakers were well aware that the only way to resume previous parities would involve a downward adjustment in wages and prices. But in each case, policymakers decided to attempt this brutal compression because of the long-term symbolic importance attached to resuming pre-war parities as an indication that pre-war “normality” would be restored.
Something similar though far less enduring occurred to rural communities in the United States during the early 1930s. Poverty and unemployment were widespread, but it was rural farming communities that were hit the hardest by a combination of falling prices and prolonged drought. Perhaps the most iconic representation of the Depression, the Joad family, in John Steinbeck’s masterpiece “The Grapes of Wrath” were farmers driven west by a combination of depression and crop failures.
What characterised all these prolonged deflations was the stubborn attempt to restore dolllar and sterling parities to gold after they had been suspended during wartime conditions at the pre-war parities. Britain tried to restore sterling to the pre-Napoleonic gold parity, the United States restored gold to the pre-Civil War parity, and both the United States and the United Kingdom restored gold convertibility at pre-1914 parities during the 1920s.
In each case, economic conditions, relative prices and the stock of money had changed significantly during the wars, and policymakers were well aware that the only way to resume previous parities would involve a downward adjustment in wages and prices. But in each case, policymakers decided to attempt this brutal compression because of the long-term symbolic importance attached to resuming pre-war parities as an indication that pre-war “normality” would be restored.