When There’s Milk in the Streets…
During the Great Depression, deflation was one of the biggest issues, though many at the time thought removing the gold standard would be inflationary. Bank runs were common and hoarding gold became outlawed. Money itself became valuable, not goods and services. That’s one of the dangers of deflation.
The value of goods and services goes down, along with living standards. Meaning everyone is working for less and any debt is harder to pay back. With the gold standard, money was a claim on gold, which was the standard for the entire world, prior to 1931. The US removed the gold standard in 1933, two years after many other countries already made a similar move. Countries couldn’t stimulate their economies by circulating more money while on the gold standard unless you wanted to devalue gold.
Paper dollars were valued so highly that money stopped circulating. People were putting money under their mattresses because it was safer than at the bank. There were over 9000 bank closures and depositors were not made whole. Wealth simply vanished.
Deflation has a negative impact on everyone, especially producers.
Rather than sell milk at low prices, fed-up farmers destroyed their milk. This was done both in protest, and to reduce supply in hopes of driving prices back up. Though market prices for milk were cheaper, farmers still had mortgages, labor, and agriculture costs to account for.
Source: Pulitzer Center
It wasn’t just dairy farmers. An excerpt from an essay on the Great Depression from the St. Louis Fed, “At the store, the price of chicken fell from 38 cents a pound to 12 cents, the price of eggs dropped from 50 cents a dozen to just over 13 cents, and the price of gasoline fell from 10 cents a gallon to less than a nickel. Still, many families went hungry, and few could afford to own a car.”
Source: Pulitzer Center
So what does the dollar represent? It represents our labor, our homes, our cars, our education, our gold, our resources, etc. This may seem ideological, but the dollar represents a lot more than just gold. Without help from the government, people used scrips (think IOU) to exchange for goods and services. Obviously, scrips weren’t backed by gold but they still found value in exchangeable currency that wasn’t backed by gold. They needed money to circulate or risk falling back into a barter economy, one where exchanging gold would be impractical.
We’ve discussed inflation before but it’s a scenario that is much preferred to deflation.
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