Brüning's “Rolling Deflation” Is Used to Argue in Favor of an International Lender of Last Resort and World Currency

It is understandable that economic and political elites fear deflation, but it is not so clear why almost all economists have developed a deflation phobia. It was this fear of deflation that has ensured that we are still stuck in the monetary system which was about to melt down in 2008. Unfortunately, at the time In Defense of Deflation was not out there to help combat the myths about price deflation.

There are all kinds of myths about price deflation that inhibit the surge of free market institutions, because these myths are used to justify interventions. The fear of a deflationary spiral is only one, albeit probably the most important of them. An almost equally harmful myth is that the rate of the growth of the money supply must be at least as high as the rate of economic growth, because otherwise there would be a harmful price deflation. This is an argument that even well-trained economists bring forward against the introduction of a gold standard or against the chances of bitcoins to become money.

Another myth that has become very relevant recently is that policies aiming at lowering costs, especially wages, and reducing public budget deficits would drive an economy into recession. Indeed, in the European sovereign debt crisis, austerity is branded as a harmful deflationary policy. Commentators recall the supposedly fateful deflationary policies of German Chancellor Heinrich Brüning in the early 1930s as a deterrent example of austerity. Moreover, the “rolling deflation” of 1931 is even used to argue in favor of an international lender of last resort, a step close to the introduction of a world currency. In this book all these myths are rebutted. There is even an historical analysis of Brüning’s policies, showing that they helped to speed up recovery.

—Philipp Bagus, preface to In Defense of Deflation, Financial and Monetary Policy Studies 41 (Cham, CH: Springer International Publishing, 2015), viii.