Major price level movements, such as Canada has experienced, generally have profoundly disturbing repercussions. They may significantly affect the level at which the economy operates, and are likely to bring about pronounced shifts in the real wealth and income of different members of the community.
Deflation
The marked deflation of 1920 and the early 1930′s were accompanied by sharp reductions in the levels of profits, employment, and production. Businessmen who had acquired large inventories, at high prices, lost heavily when prices fell. Falling prices generated pessimism in regard to the future and a general hesitation to produce goods for future sale, or to undertake investments which would yield their benefit in the future. A great many workers lost their jobs and production declined heavily. Debtors became heavily oppressed as falling prices increased the real value of their debts and of their interest obligations. In many cases the falling prices, at the same time, sharply reduced debtors incomes. Thus farmers of Western Canada who had borrowed large sums to purchase more land and equipment, were reduced to desperate straits when the prices of farm products fell heavily. With incomes sharply reduced, the obligation to pay a fixed amount of interest each year proved to be a crushing burden. they suffered in this way in the early 1920′s and again in the 1930′s.
Not all people were adversely affected by deflation, however. People who had savings in the form of cash or fixed value securities such as bonds, found that the real value of their savings had increased. With prices lower, each dollar of their savings could buy more than before. People whose incomes were fixed in terms of money similarly benefited from the deflation. Pensioners receiving fixed pensions, bondholders who received fixed amounts of money as interest, employees who continued to receive their usual salaries, all found that the deflation had increased their real incomes. Not all bondholders and salaried employees were so lucky, however. Many bondholders were unable during deflationary periods to collect the money due them, and many salaried employees lost their jobs. The seemingly “fixed’ incomes turned out not to be “fixed” after all.
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