Supply.

[brentdax]

This began as a reply to a post on bgmaster's journal that outgrew its playpen.

I.
To have any sensible discussion about inflation and deflation, you need to decouple two concepts that a lot of people jumble up: price level and money supply. The money supply is the quantity of money in circulation, taking into account the multiplicative effects of banks

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[brentdax]

The argument against the stimulus is that it doesn't ease the pain, it just spreads it out over time. The analogy I've heard is that it's like peeling off a band-aid-you can do it quickly or you can do it slowly, but you can't avoid the fact that it's going to hurt.

I need to look up the numbers, but it's only by measures of price levels that the 1873-1890s "Long Depression" looks like horrible pain. First of all, it's worth noting that there was genuine deflation-of the M1 money supply, no less-starting in 1873, because the US had just de-monetized silver, leaving only the gold supply to serve as money. The Treasury was actively withdrawing U.S. Notes (specie-backed paper currency) from the economy to reflect the reduced monetary base. But the only measure that shows the depression lasting past 1879 is price levels, which (as I mentioned) were falling slowly since the U.S. had no inflation at the time but was seeing major productivity gains. Other measures of the economy, like employment, productivity, and GDP growth, were just fine during that period.

If you look back through history, you will never find anything like the Great Depression. That's because never before had governments tried to prop up wages and prices when they were trying to fall. Long, nasty recessions just don't happen in environments with a stable money supply, and they're never quite so long and nasty without a lot of other interference as well.