The Great Deflation

The Great Deflation or the Great Sag refers to the period from 1870 until 1890 in which world prices of goods, materials and labor decreased, although at a low rate of less than 2% annually. This is one of the few sustained periods of deflationary growth in the history of the United States. This had a negative effect on businesses in established industrial economies such as Great Britain while simultaneously allowing incredible growth in the United States which was just beginning to industrialize. See: Long depression

There were several so called depressions during the period that were actually profit recessions. Many businesses suffered, such as warehousing, especially in the London area, due to improvements in transportation, like efficient steam shipping and the opening of the Suez Canal, and also because of the international telegraph network. Displaced workers found new employment in the expanding economy as real incomes grew.

By contrast to the mild deflation of the so called Great Deflation, the deflation of the 1930s Great Depression was so severe that deflation today is associated with recessions, but in fact there is no clear link.

Productivity caused deflation

The Great Deflation occurred at the beginning of the period sometimes called the Second Industrial Revolution. It was characterized by dramatic increases in productivity made possible by inexpensive Bessemer and open hearth steel, the railroad boom, efficient steam shipping and animal powered agricultural mechanization. The prices of most basic commodities fell almost continuously; however, wages remained steady. Goods produced by craftsmen, as opposed to in factories, did not decrease in cost.

One of the best sources on this topic is David Ames Wells (1891).

See also

• Productivity improving technologies (historical)
• Long depression#Myth of the Long Depression