How an Economy Grows and Why It Crashes

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P R O S P E R I T Y   L O V E S   C O M P A N Y
T
here is no greater propaganda victory in economics 
today than the complete vilifi cation of defl ation (and 
the relative acceptance of infl ation). As far as economists 
and politicians are concerned, defl ation, which is defi ned 
as the overall decline of prices over time, is the economic 
equivalent of the bubonic plague. At the slightest whiff of 
defl ation, governments will typically enact policies to push 
prices back up. 
But what’s wrong with falling prices? Habituated as we 
have become to steadily rising prices, it would shock just 
about everyone to know that prices in the United States fell 
steadily for almost 150 years…from the late 1700s all the 
way to 1913! But during that time we experienced some 
of the fastest economic growth in the history of the planet. 
This was made possible for the precise reasons described in 
this chapter: increased effi ciency. When combined with a 
stable supply of money (as existed in the United States until 
the establishment of the Federal Reserve), effi ciency will 
push prices down. 
The vastly increased productivity of the industrial revolution 
made it possible for working-class people to afford all kinds 
of goods, like upholstered furniture, tailored clothing, 
plumbing, and wheeled transportation, that were previously 
available only to the rich. Defl ation meant that $100 saved 
in 1850 could buy many more goods and services in 1880. 
Why is this not a good thing? While modern grandparents 
habitually point out how much cheaper stuff was when they