ESRI Discussion Paper Series No.62
Why Did Deflation in the 19th Century Start and End?

September, 2003
Yutaka Harada
(Executive Research Fellow,Economic and Social Research Institute, Cabinet Office)
Kazuyoshi Nakata
(Deputy Director for Overseas Economies, Cabinet Office)
Megumi Sagara
(Graduate Student, Graduate School of Economics, Keio University)

The full text is written in Japanese.


Japan's economy today is plagued with a persistent deflation. From the early 1870s to the middle of the 1990s, however, Western countries too suffered from deflation. At that time, those countries experienced a fall in prices despite of a rise in money supply.

In Japan, there is a controversy whether monetary policy is useful in battling deflation. The experiences of Western countries in the 19th century will give us some insight and suggestions, but they may not fit Japan's economic situation today.

The lesson that we could obtain from those experiences is simple. The reason why prices fell significantly while the money supply increased sharply in that age is that real production increased even more rapidly. Prices fell more rapidly than the ratio of money to real production decreased. This occurred due to the increase of the desire for holding money among the people. That is, prices did not increase because real production increased and the ratio of money to GDP increased.

Deflation in the 19th century ended in the middle of the 1990s, and prices began to increase gradually with the increase of base money. Why, then, did the base money increase? Because gold mines in South Africa and Canada were discovered and new technologies that better extracted gold from the mines were introduced. Base money controlled under the gold standard increased due to the increase in the production of gold. As the result, a period of deflation that lasted for 30 years came to an end. It is clear that this increment of money led to an overcoming of deflation; the discovery of gold is considered to be an exogenous factor.

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