From: M Holmes 
Newsgroups: uk.finance
Subject: Re: Bank lending policy
Date: Thu, 19 May 2005 17:30:37 +0000 (UTC)

Tim  wrote:
>> "Tim" wrote:
>> > Hmmmm.  I wonder - do people expect (say) a one-shilling
>> > coin, minted in (say) 1890, to be worth only 5 pence now??
>> > *I* wouldn't expect that....
>>
> "M Holmes" wrote
>> They almost certainly didn't, which just shows
>> that inflation unacompanied by sufficient
>> deflation is even more pernicious than deflation.

> Can you re-phrase that?
> I'm not quite sure what you're aiming at...

Prior to The Great Inflation, people were quite used to the idea that
sometimes we got inflation and sometimes we got deflation. The price of
bread in 1900 wasn't significantly different from the price of Bread 400
years earlier, give or take the point in the cycle. Deflation wasn't
something that worried people. In fact deflations are often accompanied
by good solid growth in the economy and folks feel better because the
price of goods is steadily falling while wages tend to be stickier.
People know they're making some headway and can roughly predict that the
price of stuff that they need won't run beyond their means.

Of course a high rate of deflation can be very problematic, just as can 
a high rate of inflation. Also the kind of demand-led (or lack of it
really) deflations that follow credit bubbles are nastier than the
cost-led deflations that were largely a feature of such periods. 

If you'd told people then that a Pound would have been worth less than a
Penny in 100 years time, they'd have been absolutely astonished.  That
onslaught of inflation in the past century has had many destructive
effects. The current credit bubble is just the last gasp of those
effects.

FoFP