The Great Depression was caused by a deflationary spiral. Inflation encourages spending, while deflation discourages it, and spending is what props up the entire economy. You need money constantly circulating, and deflation makes that grind to a halt because it's individually more financially sensible to delay as many purchases as possible during deflation.
We should probably add in that it's the RIGHT amount of inflation promotes consumption. Too high of inflation has similar outputs with different motivators.
The banking failure was worsened and lengthened by deflation. We wouldn't call it the Great Depression if not for the deflationary part. It wouldn't have been nearly as long or as intense, and the economic recovery would have been much faster.
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u/Charming-Fig-2544 7h ago
The Great Depression was caused by a deflationary spiral. Inflation encourages spending, while deflation discourages it, and spending is what props up the entire economy. You need money constantly circulating, and deflation makes that grind to a halt because it's individually more financially sensible to delay as many purchases as possible during deflation.