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How did deflation affect prices during the Great Depression?
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Great Depression
Unemployed men standing in line outside a soup kitchen, Chicago.
During the Great Depression, the United States and other industrialized nations experienced severe deflation, characterized by a precipitous decline in the general price level. Between 1929 and 1933, the U.S. wholesale price index fell by 33 percent.12
This deflationary environment created a destructive economic cycle:
- Expectations and Spending: As consumers and businesses observed actual price declines, they began to anticipate further drops in the future. Consequently, many people delayed purchases and avoided borrowing, fearing that future wages and profits would be insufficient to cover loan payments.32
- Deflationary Spiral: To attract customers amid falling demand, companies were forced to lower prices further. As revenues dropped, businesses struggled to remain profitable, leading to reduced investment, widespread layoffs, and increased unemployment.32
- Impact on Commodities: The prices of primary commodities—such as coffee, cotton, rubber, and silk—declined even more dramatically, often falling by half between 1929 and 1930, which severely harmed producers.1
Ultimately, this cycle of falling prices, reduced spending, and business failure deepened the economic contraction, contributing to a 30 percent decline in real gross domestic product.312