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Are there examples of slow, steady deflation?

It’s long been understood and I’ve got many excellent examples of rapid large-scale deflation and inflation in the value of currency absolutely wrecking economies. I also have many excellent examples of economies living with long-term inflation at slow steady rates quite happily. Are there any good examples of economies living with long-term deflation at slow steady rates? If so, what effect has slow deflation had on these economies?

Answer 21

I would look at Japan, where deflation is causing a drain in confidence, and has made monetary policy tools useless. It coincides with Japan's lowest growth for four decades. Note however the final data point!

Chart showing deflation in Japan since 1994

The effects on currency appear to be less extreme in Japan's case. Bear in mind this indicator is also affected by inflation in the US, but it paints a picture.

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Answer 679

After the Civil War the greenback went back to being on a gold standard in 1879. After 1879 greenbacks could be redeemed for gold. Gold restricts money growth since it is difficult to obtain.

Here are the price and wage indexes from 1869 - 1889 (from here): alt text

Notice from 1879 to 1889 that wholesale and consumer prices fall but wages start to increase. Imagine your salary staying the same (or even increasing) but the prices of items falling. This is due to the increased productive capacity of people. People become more productive as they implement new tools and thus they are able to produce more items at the same or lower price.

Increased productivity comes from savings. Where would you get the money if you were going to start a new business or purchase a machine to increase production for your business? You would either have to save the money yourself or borrow the money from someone who has already saved the money. Thus, saved money (i.e. capital) is an important part of improving the standard of living for people. People are more willing to save money if the money does not lose its value over time. This is what happened during the late 19th century. People saved money, interest rates were 4-5%, and tremendous economic growth was experienced. Of course, some economists correlate falling prices with a depression but this is not always the case.

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