There have been several deflationary periods in U.S. history. The concept only seems unusual because so little deflation occurred throughout the second half of the 20th century. In fact, the dramatic and consistent price increases from 1950 to 2000 have been unparalleled since the founding of the country. U.S. consumers saw falling prices between 1817 and 1860 and again from 1865 to 1900. The most dramatic deflation in U.S. history took place between 1930 and 1933.

Money Prices in the 19th Century

The U.S. did not have a single national currency until after the Civil War, but economists can still track consumer prices in terms of the exchange value of gold. In 1991, economist John J. McCusker published a historical price index of money values in the U.S. He found that the price level (the average of current prices across the entire spectrum of goods and services produced in the economy) was actually 50% higher in 1800 than it was in 1900.

Prices rose during the War of 1812 before falling again around 1815-1817. Buoyed by the rise of industrial mechanization, prices of goods dropped and output grew consistently until the start of the Civil War. The U.S. government printed money and borrowed heavily during the war but ceased once peace resumed.

The period between 1873 and 1879 saw prices drop by nearly 3% per year, yet real national product growth was almost 7% during the same time. Despite the demonstrated economic growth and rise of real wages, historians have taken to calling this period "The Long Depression" because of its dropping price level.

The Fed, the Great Depression and Inflation

When the Federal Reserve was established in 1913, the price level in the U.S. was still lower than it was in 1800. Over the next 100 years, the dollar lost 96% of its value, causing nominal prices to rise nearly 2,000%.

Despite this, the most dramatic period of deflation in U.S. history took place at the outset of the Great Depression. Prices dropped an average of 10% from 1930-1933. Unlike the productivity-driven deflation of the 19th century, this drop resulted from a collapsing financial sector characterized by bank runs and bank failures.